The downgrade from TripleAAA to AA+ by Standard & Poors raises many questions. Here is my list of most important issues the downgrade raises:

1. The change in trajectory of US debt was in service of Banks: It began with TARP, and continued with every other bailout/stimulus/economic plan. What was S&P’s role in creating that crisis?

2. How will non-US investors (Private and Central Banks) view the downgrade?

3. What is S&P’s methodology of rating sovereigns beyond Probability of Default? How does this differ from other rating agencies?

4. What does the downgrade do to US currency — is that the true impact of the credit downgrade?

5. Will borrowing costs likely increase for the US? What about consumers?

6.  Will the downgrade of US spill over to other agencies, states, municipalities?

7. Will private sector holders of US Treasuries — insurers, pension, foundations, etc. — be downgraded as well?

8. Why did the rating agency not wait until the special committee / debt ceiling deal was completed later this year?

9. The Rating Agencies were downgraded by Dodd-Frank, with all regulatory and legal references to be removed. Was S&P’s move retaliatory?

10. How will US markets open on Monday in response to the downgrade?

Thanks to Josh Rosner, Scott Frew, and other anonymous participants . . .

Category: Analysts, Bailouts, Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

85 Responses to “10 Questions About S&P Downgrade”

  1. crutcher says:

    Rating agencies lost massive cred in 2008-2009 and now finally are getting a tiny bit back by making a few official acknowledgments that all is not well in never land. Probably some of these people know they ought to have been closed down on the spot, and are busy trying to construct a new wet-paint facade of credibility.

    I’m not saying I’m not disgusted, just that it appears to be working.

  2. rktbrkr says:

    Those are some terrific questions – basically the ripple thru effects are unimaginable – literally. If the US was downgraded then the holders of US paper should be downgraded – if that starts then US paper gets dumped, US borrowing expenses go up and the holders take immediate haircuts. If foreign holders of US paper start dumping then that drags down the dollar.

    No more bailouts for banks, states and munis going forward. Good luck with pensions (PBGC), any special help for FDIC if there is a big bank failure. When there is a big bank failure.

    I imagine the PPT will be going thru drills this weekend. Fed now has cover to start QEIII

  3. davossherman@gmail.com says:

    Subprime mortage rates AAA.

    US rates AA+.

  4. AnnaLee says:

    Were there any ongoing investigations by our or other governments into S&P’s possible fraudulent role in the ratings of the CDO’s?

    Does S&P have any conflict of interest when it comes to the way a country, including the US, solves it’s long term debt problems or who is in power determining policy?

    Does it give anyone else a chill that a single private company could hold the ability of a country to solve it’s problems hostage? What if the private company has a recent record of accepting payoffs for ratings?

  5. MayorQuimby says:

    I’d LOVE to hear Barrys thoughts on last weeks selling in light of this news. But i suspect he will keep quiet about the blood bath we just saw.

  6. paloo says:

    Not sure what what is the most indictable offence.

    The CRAs for all those CDOs, or Treasury for reducing itself to the mimic of PIIGS squealing.

    “Sauve qui peut”?

  7. Well, at least TripleAAA countries still like us!

    France Strikes Confident Tone on U.S. Economy

    That’s the WSJ, not the Onion

  8. machinehead says:

    ‘What does the downgrade do to US currency?’

    Nothing, probably. Currencies trade off differentials in interest rates, inflation and expected growth — whether their issuers are AAA-rated, bankrupt, or somewhere in between.

    S&P’s downgrade has great publicity value, but probably is a non-event in the markets. Whether a recession occurs in 2012 is of far greater import for Treasuries than S&P’s debt rating. And S&P doesn’t have a clue about the future trajectory of the economy.

  9. ilsm says:

    I sold my war bonds when Reagan’s “build-up” started buying stuff that did not work. Like the B-1……..

  10. dead hobo says:

    They’re finally starting to act responsibly.

    Deal with it.

  11. rahuldeodhar says:

    Answers:

    1) S&P is centrally responsible. So are US regulators, banks and those crying hoarse. Let us remember there is plenty of blame to go around for GFC.

    2) Most non-US investors already discount the news. However, investment strategies will compel some to act if another agency downgrades.

    4) Over 5 year horizon I think USD will begin to decline. A declining dollar is in the interest of US. It will reinforce US manufacturing. Immediately, though, flight to cash and commodities seem to be possible options.

    5) Borrowing costs for US entities will increase. I suspect the ability to pass on these cost to consumers will remain under pressure. Consumer rates, after accounting for all adjustments, a quite high. It will impact borrowing cost of investors, leverage will be difficult to come by.

    8) I think the rating rationale was more political than financial – more related to “willingness to pay” rather than “ability to pay”. The debt committee would have done more related to “ability to pay”. The statements by politicians about “debt ceiling debates hereafter should be conducted this way”, “maybe default is a good option” etc. makes one really skeptical of US governance. You see such things in banana republics not US – definitely not a behaviour of AAA rated sovereign.

    9) I don’t think so.

    10) Move to cash and commodities could be a good idea to bet on. Though one can never be adequately sure.

  12. DeDude says:

    The downgrade is really not justified as in that $9 trillion of external debt would represent a big fiscal challenge for a $14 trillion economy. Furthermore, it is silly to suggest that a country that has the worlds reserve currency and can print as much of it as it needs, could be forced to default. However, a downgrade may be justified in that our political system has demonstrated a complete lack of ability to implement the revenue enhancements that are needed to reduce the debt. It is probably fair to include not just considerations of whether a country is rich enough to stand behind its debt, but also whether its political system is willing to do what it takes.

  13. dead hobo says:

    Golly.

    First S&P actually rates some credit and threatens further downgrades if Uncle Stupid continues to act out.

    Next, and heaven forfend, what if the Fed actually doesn’t do a third money dump and provide another boost of asset inflation, funding Wall Street bonuses and making pundits who claim S&P1400 is a sure thing by end of year look smart? No money dump = no bonus and stupid looking prognosticators.

    Although this is probably impossible, what if the CFTC and other world regulators take steps to prevent oil from being treated as an asset class, and it rightfully goes back to only being treated as a commodity. If that were to happen, a trillion in middleman profits would disappear and cash would remain in consumer’s pockets.

    What if quote stuffing and other renegade HFT techniques are outlawed, leaving only benign and economically efficient HFT techniques only.

    These are Wall Street nightmares.

  14. Global Eyes says:

    America is still a TripleAAA country temporarily overshadowed by an ungrateful oversight committee. Will they downgrade their namesake S&P 500 index, too? Uh-oh…

  15. ToNYC says:

    At what stage in this drama of financing empire have we arrived when the failed painters of the Potemkin Village become the architects of value? This is the next scene from “Blazing Saddles”, after Cleavon Little (R.I.P.) does his self-kidnap routine, something about the red men being darker than us. Timmy’s a big fan of NetFlix so lots of drama to come. Cowboys and Congresspersons.

  16. rktbrkr says:

    The uncertainty should put a chill on major purchase decisions “Honey, lets wait and see what happens before we buy the new (home, car, boat, kitchen)”

    The teabaggers have sandbagged the economy.

  17. immerheiter says:

    It’s so simple. The US is not paying them.

  18. beaufou says:

    I have a question.

    The rumor of a degradation has been around since the beginning of last week, is it already priced in and is it the reason the markets didn’t respond to the so-called good news of an accord on the debt ceiling?

  19. dead hobo says:

    rktbrkr Says:
    August 6th, 2011 at 9:13 am

    The uncertainty should put a chill on major purchase decisions “Honey, lets wait and see what happens before we buy the new (home, car, boat, kitchen)”

    The teabaggers have sandbagged the economy.

    reply:
    ————–
    Sorry, not true.

    This is actually the beginning of a slow motion train wreck. The economy started expanding around 1995. An explosion in money, credit, risk tolerance, and debt resulted. The world took 25 years but has hit peak credit, which is analogous to the concept of peak oil. In total, all the credit the world can afford has been exceeded and now the bill has to be paid. Money printing, default, eventual deflation, and austerity are the end result. The US equity market will probably have a similar footprint to Japan circa 1990 in the not too distant future, perhaps 2014 or 2015.

    The Fed wants incomes to rise to price levels. This will never happen. Prices will eventually fall to income levels no matter how much money they print or how much debt they subsidize. Changing tastes and preferences will account for what incomes can’t otherwise afford. This kind of inevitable deflation will be doom for the debt markets and debt issuers, since cash will increase in value as deflation advances. Gold will fall to maybe $400 or less.

    The S&P downgrade is only the first baby step in this progression.

  20. dead hobo says:

    There goes the weird censoring again.

  21. DeDude says:

    9. It does seem amazing that a $2 trillion error is pointed out to them and they only take a few hours to decide that their original rating is still valid and should immediately be made public. How can their rating be fact-based, if such a serious change in facts does not even cause them to take a second look.

    If they were about to be indicted, or raided then this kind of rating would block that action for enough time that they can destroy the evidence. I mean the Fed could not possibly raid their offices the week-end after this rating was released, because that would create panic in an already nervous market.

  22. RW says:

    The US is an economic and political mess but S&P no longer has standing to make the judgement and never had a model worthy of the name WRT evaluating sovereign debt even when its ratings meant something.

    The currency and debt of the US will be relatively unaffected by the rating downgrade but a host of institutions and individuals who have assets pegged to or collateralized with that currency and debt will be harmed.

    As others have pointed out the uncertainty introduced into the debt and equity markets by the political brinkmanship of the Republicans has now been compounded by S&P.

  23. gareneau says:

    One other question: how do split ratings affect the institutional holders of U.S. debt? If Moody’s and Fitch still rate the U.S. as a AAA credit, does this mean portfolio managers who have to hold AAA debt can rely on those ratings as opposed to S&P? If so, it seems to me this would eliminate alot of the chaos that people have speculated would ensue upon a downgrade.

  24. markp says:

    @ilsm:
    Sorry to hear that you missed the greatest bull market in bonds in history.

  25. Concerned Neighbour says:

    I’m as upset at S&P’s enabling of the sub-prime mess as much as the next guy, but that doesn’t necessarily taint all their future ratings. I believe their rating is fair and arguably could have been made a while ago. The fiscal trajectory is horrible (10% of GDP deficits), the starting point is grim, and the ability to get anything done politically is almost nil. The silver lining to this well-earned embarassment is that it may actually cause adults to wake up and act, though I have my strongs doubts in this regard.

    1. S&P enabled the crisis by shoddy analysis.
    2. Embarassment. I caught a bit of BTV last night, and I saw a lot of denial.
    4. I suspect not much. We’re into an era of competitive devaluations, and what central banks do through money printing will have a much greater impact.
    5. They should, but probably won’t by much, in part because the Fed has printed so much to buy debt.
    6. Just about everything uses the risk free rate – the short-term treasury – as a reference, so you’d have to think the answer will be yes.
    7. If Treasuries are a large portion of their holdings, logically the answer would have to be yes.
    8. As David Beers from S&P said yesterday, the range of outcomes is between $1.2T and $1.5T in additional cuts. $0.3T in cuts is not enough to sway a decision one way or the other when we’re talking about $1.6T annual deficits. Also, what about the political climate suggests a more ambitious/credible plan can come about in these 3 months?
    9. Hopefully not. I think it was justified by the numbers and the political climate.
    10. Down, one would think. The rumours were circulating as early as Thursday though, so part of it is likely already priced in. Certainly not a good development for confidence, though.

  26. Concerned Neighbour says:

    I’m as upset at S&P’s enabling of the sub-prime mess as much as the next guy, but that doesn’t necessarily taint all their future ratings. I believe their rating is fair and arguably could have been made a while ago. The fiscal trajectory is horrible (10% of GDP deficits), the starting point is grim, and the ability to get anything done politically is almost nil. The silver lining to this well-earned embarassment is that it may actually cause adults to wake up and act, though I have my strongs doubts in this regard.

    1. S&P enabled the crisis by shoddy analysis.
    2. Embarassment. I caught a bit of BTV last night, and I saw a lot of denial.
    4. I suspect not much. We’re into an era of competitive devaluations, and what central banks do through money printing will have a much greater impact.
    5. They should, but probably won’t by much, in part because the Fed has printed so much to buy debt.
    6. Just about everything uses the risk free rate – the short-term treasury – as a reference, so you’d have to think the answer will be yes.
    7. If Treasuries are a large portion of their holdings, logically the answer would have to be yes.
    8. As David Beers from S&P said yesterday, the range of outcomes is between $1.2T and $1.5T in additional cuts. $0.3T in cuts is not enough to sway a decision one way or the other when we’re talking about $1.6T annual deficits. Also, what about the political climate suggests a more ambitious/credible plan can come about in these 3 months?
    9. Hopefully not. I think it was justified by the numbers and the political climate.
    10. Down, one would think. The rumours were circulating as early as Thursday though, so part of it is likely already priced in. Certainly not a good development for confidence, though..

  27. Transor Z says:

    Does a currency downgrade boost U.S. manufacturing?

  28. cthwaites says:

    Good questions. But we do have a sort of case study: Japan 1990-2011.

    Lots of down/up grades and the total retun to a $ investor using Japanese long term bonds was over 700%.

    That’s why bond investors can be so dangerous. Great absolute and inflation adjusted returns…..to heck with the economy.

  29. jritzema says:

    As S&P has somehow successfully argued for a while now their ratings are just an opinion. How do you evaluate the opinion on someone who can’t do math? Not very highly.

    http://www.bloomberg.com/news/2011-08-06/s-p-s-analysis-was-flawed-by-2-trillion-error-treasury-says.html

  30. forwhomthebelltolls says:

    Purely coincidental…But I have changed my own rating this morning to IDGAF.

    No upgrade in sight, I can assure you.

  31. farmera1 says:

    God I love a pop quiz on a Saturday morning.

    QUESTION 1
    S and P is one of the big 5 causes of the crash. THE OTHER 4 ARE PRIME DRIVERS ARE : 2. Bush; cut taxes, start a two front war and expect good things to happen to the economy. Now there is a good one. – 3 Greenspan (the Ayn Rand freak)4 and 5 Radical/Stupid Deregulation/Congress

    QUESTION 2
    Poorly, China has in fact already downgraded US debt. They are ahead of the curve.

    QUESTION 3
    Have to leave this one blank. No idea.

    QUESTION 4
    Impact more mental than anything, but mental is big. Taxi drivers and hookers in Paris will no longer take green backs, that sort of thing.

    QUESTION 5
    Yes, borrowing costs will go up, it’s going to leave a mark.

    QUESTION 6
    Yep, (I sold muni holdings a long time ago, but I live in Michigan).

    QUESTION 7
    Yes when the foundation of your investments is downgraded how can your rating not be downgraded.

    QUESTION 8
    Why would they. Repubs are going to fight any taxes, military cuts, they like wars etc. No hope there.

    QUESTION 9
    Yes but always remember when you start down the road of revenge, dig two graves.

    QUESTION 10
    I try not to predict short term market moves. Holding gun to own head, I say DOWN.

  32. nicholsong says:

    All interesting questions, Mr. Ritholtz. Especially #9, which I’ve heard no one but you ask. I’m glad you did; it never would have occurred to me. I have no idea as to its answer yet.

    1. Complicit, but more remora than shark.
    2. Don’t know.
    3. Don’t know.
    4 & 5. I suspect it would get harder to monetize, though how is perhaps counter-intuitive; I expect prices will go up, yields will go down. Not sure when.
    6. Do you mean will the downgrade spill over into munis being downgraded? Hmm…
    7. I’m sure that’s an unwelcome thought to many. I don’t know.
    8. Not only why didn’t they wait, who knew it was coming; who on K street is going to make $$ Monday?
    9. I have no idea, but speaking of retaliation: http://is.gd/kltB7x
    10. I’ll guess commodities up (esp PMS), losses to USDCHF, USDJPY. Equities I don’t know.

  33. [...] The Big Picture – 10 Questions About S&P Downgrade [...]

  34. RW says:

    My comment above was truncated (probably overly hasty C&P), meant to add:

    Uncertainty can be overplayed though because, in this context at least, certainty has increased in one definite respect: US and European leadership have drunk the Austerian Koolaid and are either rejecting expansionary economic policy and/or dedicating themselves to contractionary policy.

    Whatever that means in the longer term — which is what S&P was presumably attempting to address in their rating fail — the negative macroeconomic implications of that in the short/intermediate term are reasonably unequivocal if the politics and policy stance remain the same.

    The devil’s closing in now, best be prepared to walk on the shifting sands.

  35. JasRas says:

    This is a crock. It still baffles me to this day why S&P, Moody, Fitch exist at all. They would have been a good start for the “perp walks” we’ve yet to see at all!

    Second this is coming from a company who has 93% of it’s earnings dependent on two sources: Financial Services and sucking from the government teat with education services. (link to fact book)

    http://investor.mcgraw-hill.com/phoenix.zhtml?c=96562&p=irol-investorfactbook

    If I was an owner of the stock, I would probably start a suit on the basis that the rating lacked objectiveness and that the board and executives failed their fiduciary responsibility by acting on personal political biases that put the corporation’s future profits at risk.

    Third: Google “countries with AAA rating” (or go to Wiki, b/c that’s the link) 18 of them. Some of which will cause a “really?!” reaction. France?! Germany?! Aren’t they up to their eyes in Piigs debt? UK?

    I think it is fairly clear this a politically biased ratings change and not objectively issued. This is for the CEO getting raked over the coals for 3months in Congressional Hearings. Because their ratings methodology has changed that much since 2008 (which should have put them in prison). Otherwise any and all EU members would be in the B’s at best simply on their EU predicament…not just the one’s that suck.

  36. codepoet says:

    Should Congress investigate the ratings agencies and their role in the Great Recession? Should they investigate how this new rating was “devised”?

  37. MikeInSF says:

    My initial thought on the downgrade was that we are screwed. Then I read this:

    [i]“We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process…The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”[/i]

    S&P has a lot to answer for now and in the past – dodgy ratings leading up to the ’08 debt crisis and potentially dodgy math used in the downgrade. But they make a very good point – if the USG can’t pull it together to avoid a default until the last possible moment and continues to behave like a banana republic, then maybe we don’t deserve an AAA rating. That said, I think the above sentiment from S&P is already or mostly priced in the market. I hope I’m right and the market recognizes that this is as much about our government as it is our debt.

  38. patient renter says:

    The big question for me is what sort of forced selloff will the downgrade trigger such as with pension and mutual funds that are only allowed to hold AAA?

  39. nicholsong says:

    From S&P’s statement:

    S&P: “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”
    …No argument there.

    S&P: “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”
    …Exactly why I think the best solution would have been to abolish it altogether. Moody’s says it creates “periodic uncertainty” and said “We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty”…Too bad NO ONE in office even proposed it, as far as I know. Seems more logical/easy/bipartisan than default, 14th amendment crises, or trillion dollar coins–all of which I think would have gone a long way to kick confidence in the groin. Sane opportunity lost.

    S&P: “It appears that for now, new revenues have dropped down on the menu of policy options. ”
    …Zinger against the Republican Tea Drinkers.

    S&P: “In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.”
    …Zinger against the Democrats.

    I’m no fan of the ratings agencies. They seem to me to have found a lucrative niche in legalized extortion. That said, I disagree with little of what I’ve read in terms of their critique of the US political system approach to ‘financing debts’. But one thing also irks me: Reading S&P’s statement reminds me of reading advocacy from some think tank. Do all ratings statements read like that? Strange days.

  40. James says:

    > Greg Ip explains the issue clearly…

    Indeed, as he highlights in the S&P report:

    “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy … [This] weakens the government’s ability to manage public finances”

    And Erza Kein at the WP, who more often than not I disagree with, makes the same point.

    Standard & Poor’s has been wrong before. But they’re right now.

    http://www.washingtonpost.com/blogs/ezra-klein/post/standard-and-poors-has-been-wrong-before-but-theyre-right-now/2011/07/11/gIQANpnIyI_blog.html?hpid=z1

    The debt-ceiling debate was a disgrace, and the resulting “solution” even worse, whatever one thinks about the timing and make up of cuts. It was already clear from comments made from both sides following the Aug 1 pact that the super committee would have been tied up in knots.

    This is no way to address our long-term fiscal issues, and S&P called us on. Whatever their previous mistakes – and those are egregious if not worse – is to miss this.

    And to add an exclamation point to yesterday’s announcement, here is China weighing in:

    China Blasts US After S&P Downgrade, Calls for New Global Reserve

    “China, the largest creditor of the world’s sole superpower, hit out at the United States for its “debt addiction” and “short sighted” political wrangling in response to Standard & Poor’s historic decision to downgrade the U.S. credit rating from AAA.”

    http://www.ibtimes.com/articles/193532/20110806/us-debt-downgrade-after-dollar-future-china-blast-standard-poo.htm

    I can only hope we find the leadership and means of moving forward now.

  41. ToNYC says:

    “Capital is not a free gift of God or of nature. It is the outcome of a provident restriction of consumption on the part of man. It is created and increased by saving and maintained by the abstention from dissaving.” -Ludwig Von Mises

    The Fed neutralizing the stored wealth and historic right to income based on one’s prudent savings since mid-2009 has destroyed all relevance to any sustainable real economic system but disintermediating the Member Banks’s illiquidity to the taxpayers. Memo to seniors: your money is worth less and not needed; Fed makes its own.

  42. MaxThrax says:

    This country was held hostage by a group of hillbillies who think Ronald Reagan cut taxes and balanced the budget, when in fact he began the era of wanton fiscal irresponsibility. These same people believe oil regenerates itself, 9/11 happened on Bill Clinton’s watch, we would have won the Vietnam War if we had just stuck it out and that Jesus will save the US because he loves us so much. Go ahead and throw in a more than just a pinch of white cultural panic at the coming end of white Christian cultural hegemony and you have the Tea Party. Also add a dash of hypocrisy as a the same citizens and politicians who insisted we had to invade Iraq on a credit card(3 Trillion?), and cut taxes for wealthy via Bush tax cuts, are not the same people screaming for austerity….not for them of course, but for everyone else, all the while blaming someone, anyone other than themselves. Nope Americans do NOT do introspection, that’s for pussies apparently.

    So while S&P were a big part of the problem, and are corrupt as hell, they’re not wrong to downgrade. Hell, I’ve been downgrading the US future to anyone who’d listen as far back as 2003. We have a corrupt government, a corrupt political system, a corrupt media and a large portion of the electorate that can only be classified as insane, and another bigger portion of the electorate that are just willfully ignorant or hopelessly misinformed. How can you NOT downgrade that?

  43. MaxThrax says:

    “are not the same people screaming for austerity”

    Should read: are NOW the same people screaming for austerity..

  44. rootless says:

    @ToNYC:

    Karl Marx would have disagreed regarding Ludwig von Mises claim that the source of capital was “restriction of consumption on the part of man”. He would have said the source of capital is abstract labor of the working class that creates surplus value, which is exploited by the capitalist class in society.

  45. red eye repub says:

    The debt ceiling debate was not a disgrace. It was a much needed wakeup call. People say the tea party was holding was holding the debt ceiling as a hostage, but it was actually much more like an intervention to a drug addict. Everyone knew a deal would be made, but the issue of limiting our spending must be brought to the public. And so it was a brilliant success, even though it really didn’t end up doing much.

    The S&P downgrade is very much the same. It’s ugly, but it forces the US to acknowledge our debt problem.

    The only solution is to cut government spending. Why? Because the public sector doesn’t MAKE anything. It’s a fact. All the government does is destroy wealth, not create it. That doesn’t mean government spending isn’t necessary, it just means it needs to be cut to decrease the burden on the people who actually are creating wealth.

  46. louiswi says:

    The down grading of debt by self appointed experts for the world’s only superpower is quite laughable.

  47. rootless says:

    Here is the document that lays out the methodology and assumption based on which S&P does sovereign government debt ratings:

    http://www2.standardandpoors.com/spf/pdf/japanArticles/1204866805563.pdf

    I think to make an educated judgment whether downgrading the US by S&P is justified or not would have to be based on a thorough analysis and criticism of this document and the criteria, assumptions, and methodology laid out in there. The alternative to this is basing the judgment about the S&P decision on gut feeling, resentment, or political bias.

  48. jabbo says:

    Explain me how can Isle of Man credit be safer than the US credit? Do the former has the same economic poweress as the US to resuscitate the world economies in case we walk towards a financial precipice again?

  49. MaxThrax says:

    Whoever proved the link to burningplatform.com is a perfect example: it’s welfare and food stamps that created this mess. The pointless ruinous wars? Nope, gotta be the food stamps. Cutting taxes for wealthy people that don’t reinvest in the country? Naw, it’s the Mexicans. Bailing out banks after the financial deregulation they supported blows up in our faces? No fucking way…..it’s the goddamn welfare queens driving around in Beamers lighting cigars with 20 dollar bills. I also love the admonishments that like Rome, our declining morals are to blame, when the fact is that all during the Roman Empire’s greatest prosperity, they were as debauched a people as you can imagine. See if we just go back to ‘Christian principles’ everything will be alright. Of course when they say ‘Christian principles’, they don’t mean the non violent, love thy neighbor, feed the poor stuff. Nope, they mean don’t suck a cock if you already have one and only fuck your wife, or maybe they just mean don’t get caught doing those things…being caught does seem to be the biggest crime you can commit in this country.

    Too big to fail? Or too stupid to succeed. This country is toast.

  50. dina says:

    S&P downgrade yesterday and most deadly attack on US troops today. Is there a connection?

  51. The consumer always get the raw end of the deal.

  52. buddhabucks says:

    Does anyone know if S&P has a political leaning (I know they love payola). It looks like the Republican hopefuls are relishing in the downgrade blaming Obama. Could this have been a politically motivated downgrade? Maybe there is money in politics, duh?

  53. carleric says:

    A quick description of the Federal Government’s economic policy:

    first, stall; second, hope for a miracle; third, express outrage over rating agency downgrades; fourth, disregard the warnings

    I see we are again as the authorized debt limit…and now the pigs start squealing for more slop….just pathetic…

  54. MaxThrax says:

    Buddhabucks, has anything occurred since 2008 that these yokels didn’t blame Obama for? They blame Obama….it’s what they do, Bush doubled the deficit, they blame Obama. In fact most of the deficit’s rise since Obama took office is due to the structural deficit in the budget left by W’s policies, which, again, these yokels supported whole heartedly. Here’s the key portion of the S&P’s release:
    “Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.”
    http://tpmdc.talkingpointsmemo.com/2011/08/sp-downgrades-us-aaa-bond-rating-to-aa-outlook-negative.php?ref=fpblg

  55. Tarkus says:

    ToNYC Says:
    August 6th, 2011 at 11:46 am

    The Fed neutralizing the stored wealth and historic right to income based on one’s prudent savings since mid-2009 has destroyed all relevance to any sustainable real economic system but disintermediating the Member Banks’s illiquidity to the taxpayers. Memo to seniors: your money is worth less and not needed; Fed makes its own.
    ————————-

    According to The Financial Times, banks were not illiquid, but insolvent.

    http://ftalphaville.ft.com/blog/2010/12/15/437726/king-of-the-wikileaks-and-global-bailouts/

    The “illiquid” meme was propagated to get TARP passed. I was waiting for that scene explaining that more fully in “Too Big To Fail”…..

  56. MayorQuimby says:

    Thought of the hour: EVERYONE agrees to blame the excess spending of the past but almost NO ONE ever complains about deficit spending in the present.

    Hilarious.

    “bush or whomever blew it!”

    +

    “we CAN’T cut spending NOW!”

    =

    Hypocrites

  57. pjfny says:

    What other AAA country has 100% debt to gdp and 10% of gdp budget deficit, a broken political decision making process, hidden losses (not marked to mkt) on most major bank balance sheets??
    What other country is printing money (QEx), to push up asset prices in an attempt to keep up the economy, independent of the real economy, so that when mkt realizes this, it will come crashing down. Which other AAA country pursues a currency depreciation (implicit) to spur the economy???

    Who can say we do not deserve to be downgraded???

  58. JimmyDean says:

    I would add – Will Moody’s and Fitch eventually pile on? Institutions will pbly let their funds hold Treasuries if 2 of the 3 rating agencies hold AAA. If Moody’s and Fitch follow S&P, mandated selling of treasuries could happen in size. Question 3 is key here.

  59. Tarkus says:

    MayorQuimby Says:
    August 6th, 2011 at 1:17 pm
    Thought of the hour: EVERYONE agrees to blame the excess spending of the past but almost NO ONE ever complains about deficit spending in the present.

    Hilarious.

    “bush or whomever blew it!”

    +

    “we CAN’T cut spending NOW!”

    =

    Hypocrites
    ————————————————-

    Sure there’s plenty of hypocrisy to go around – neither side has monopolized it…..

    BUT – comparing what happens during a period of government surplus to a period of a second Great Depression is a bit of a stretch.

    So with private companies hoarding cash and not hiring because there is diminishing demand, and now government constrained from hiring, what is the outcome?

    Seems more like that surplus in 2000 threw a hell of a party and now people are complaining about the hangover.

  60. rktbrkr says:

    Should be some interesting cash flows this week, maybe why BONY Mellon put in the deposit penalties, on the other hand people may start drawing out cash currency – just in case.

  61. Mike in Nola says:

    This may well be a good example of the threat being greater than the execution and may be the beginning of the end of the agencies.

    Their big role in the 2000′s was to slap a rating on securities so that those with some legal requirement on what they could hold could buy the securities and they helped some other investors feel more comfortable with complex securities.

    As we all know, that was a big fraud. These days, no one who can think pays any attention to them; only those with some kind of mandate do. Fitch and Moody’s were smart enough to see that and decided discretion was the better part of valor. The joint statement from the Fed, Treasury, OCC, et al, basically said everyone could ignore S&P. So what do they have to sell now?

    @MayorQuimby Friendly advice: people with one-track minds quickly get ignored here, esp if they only regurgitate what Rupert’s mediamonkeys tell them.

  62. dougc says:

    according to zero hedge the Germans have refused to back the effort to enlarge ESFS to cover Italian debt and China will not bail them out. Monday may be very interesting!!

  63. ToNYC says:

    @Tarkus

    Yes, of course, illiquidity is for the victims; insolvency is the Member Banks’ current arbitrage.

  64. gman says:

    In S&P world France and sub-prime mortgages are AAA and the US only AA…haha

  65. Robespierre says:

    1. …What was S&P’s role in creating that crisis?
    He went along with the banksters so yes they plaid a important role

    2. How will non-US investors (Private and Central Banks) view the downgrade?
    Well lets see China and Japan can’t stop buying our bonds unless they are willing to let their currencies

    3. Not a clue

    4. What does the downgrade do to US currency — is that the true impact of the credit downgrade?
    Against which one? As we have seen time and time again the “others” are intervineen ALL the time not to appreciate against the dollar (BoJ, PBOC, ECB an others). So while there may be some volatility I expect not much change

    5. Will borrowing costs likely increase for the US? What about consumers? Not for the US may be for the consumer. Actually I expect US bonds to rally a bit

    6. Will the downgrade of US spill over to other agencies, states, municipalities? This one is a fat yes

    7. Will private sector holders of US Treasuries — insurers, pension, foundations, etc. — be downgraded as well?
    And PBOC and BoJ etc I mean really where do you stop?

    8. Why did the rating agency not wait until the special committee / debt ceiling deal was completed later this year?
    Because this is pay back. BTW I think this is the straw that breaks Obamas re-election back. He will not be re-elected so the Republicans lose a very good conservative president

    9. The Rating Agencies were downgraded by Dodd-Frank, with all regulatory and legal references to be removed. Was S&P’s move retaliatory?
    Yes

    10. How will US markets open on Monday in response to the downgrade? After what is going on in Europa most likely down but it could also go the other way. Basically I have no clue

  66. mackusick says:

    Anna Lee.
    Good questions but addressed to the wrong private company.
    Apply the same questions to the FED,
    a private company at the heart of all America’s problems

  67. GrafSchweik says:

    Robespierre wrote:

    “8. Why did the rating agency not wait until the special committee / debt ceiling deal was completed later this year?
    Because this is pay back. BTW I think this is the straw that breaks Obamas re-election back. He will not be re-elected so the Republicans lose a very good conservative president”

    Mon dieu, Monsieur R! Vous avez raison! [You are right]

    Increasingly, I think of Agent Smith’s offline chat with Morpheus in ‘The Matrix’: humans share a lot of characteristics with viruses. The Finance Virus will replicate until it destroys all its hosts. Only then will we be rid of it—until the next time!

    The only question I have is, how many of us will be around when this plague ends?

  68. mathman says:

    Max Kaiser says the dollar will fall or even collapse as a result of the underlying money-printing by the Fed. China doesn’t think we should hold the reserve currency any more as a result of this downgrade.
    It looks like we’re real close to having a Greek problem.

    Here’s Kaiser:

    http://rt.com/programs/keiser-report/keiser-report-170/

  69. WaveCatcher says:

    Follow the money…

    Who would pay S&P to downgrade US Debt?

  70. Winston Munn says:

    Although uncertainty can put a chill on major purchase decisions, the question at this point is: “Honey, lets wait and see if we can get jobs before we buy a new (home, car, boat, kitchen)”

  71. philipat says:

    I agree that the Ratings Agencies were involved in “Payola” with the Banks. I also agree that both the Ratings Agencies AND the Banksters should have been severely punished, including jail time for the reposible execs. However, the fact is, for whatever reasons, the corrupt US system has not allowed such to happen. So, life goes on. If S&P and the others now start to make honest assessments of credit risk, I don’t see how they can be criticised, unless by continuing to be whores they can prove that “Two wrongs make a right”? (Or perhaps Timmy and Ben refused to print afew extra dollars and push them their way?). On any objective basis, there are very few countries who truly deserve AAA ratings, Canada, Australia, Sweden, Finland amongst them. In reality, were it not for the fact that the US can print what, for now, remains the world’s reserve currency, the rating would be substantially below AA+, even A would be a stretch.

    Incidentally, what do the markets make of this on Monday? Was it already priced in?

  72. philipat says:

    Incidentally, a 10% correction was once regarded as being a fairly normal and unserstanable event which has always taken place in the markets with some regularity. Now, it is “A bloodbath”, “Armaggedon” or worse. THis seems to me to be a perfect illustration of what baby’s Americans have become. Anything remotely resembling sacrifice, like losing a second home, a third car or a market correction is too much pain to bear. Any wonder that American politicians behave the way they do?

  73. [...] 10 Questions About S&P Downgrade (The Big Picture) [...]

  74. Mike in Nola says:

    @mathman: I generally like Kaiser, but all the BS about China is just that. China’s whole economic model is their central bank’s subsidies to manufacturers which sell to the US (and Europe to some extent): the central bank buys the dollars the manufacturers get from us and gives the manufacturers RMB in exchange, all on a basis that keeps their own currency cheap compared to ours. If they don’t accept dollars, they are outta business. It’s that simple.

    They are trying to do the same with Europe which is why they’ve started buying European bonds to try to keep the Euro from falling apart. If it does, they will have trouble selling to Europe using the same scheme.

  75. wally says:

    S&P admits the initial downgrade was based on flawed calculations… but then they proceed anyway?

    Something is wrong with this picture. One must ask: what’s the real game they are playing?

    If the downgrade isn’t based on consistent calculations – and that apparently can be proven – are they liable for financial damages they cause?

  76. hrux says:

    It is my suspicion that several of you (including BR) are missing the macro issue here. The downgrade of US sovereign is NOT irrelevant due to the following:
    1) It will force S&P to downgrade JP Morgan (as the sovereign stands behind the banking system, you cannot have a bank rated higher than the sovereign),
    2) Force S&P to downgrade several European sovereigns, most notably France. Once France gets downgraded, several French banks will get downgraded.

    It will then spread to other countries, and we have the potential for another crisis, so don’t underestimate the significance of this.

  77. JerseyCynic says:

    http://www.politico.com/news/stories/0811/60803.html

    S&P warns of a second downgrade

    Where’s DSK?

    Can you say NEW WORLD ORDER and ONE WORLD CURRENCY

  78. constantnormal says:

    Wow. I am clearly way late to this party.

    Given: S&P are obviously douchebags, and their methodology is fulla crap.

    However, IMHO, the AA+ rating is justified. Even idiots can stumble onto the correct answer by accident.

    If the rest of the world gets downgraded as well, so much the better. With the astronomical amounts of swaps orbiting the planet, can anyone seriously believe that the global economy is sound?

    Actually, AA+ is probably generous, given the actual real levels of risk we are all swimming in.

  79. fp says:

    Well, Japan is AA- and their 10 year bonds are at 1.1%, so I’m not too worried about our borrowing costs going up. Treasuries have been rallying lately despite the threat of a downgrade and worse, the threat of possible default, so it seems the bond market does not care. S&P is a joke after giving AAA ratings to mortgage-backed securities and an A rating to Lehman. So the downgrade is a complete non-issue I think. The market still might tank on Monday because of all the other problems with the economy, of course.

  80. bram says:

    >WaveCatcher Says:
    >August 6th, 2011 at 6:09 pm
    >Follow the money…
    >
    >Who would pay S&P to downgrade US Debt?

    something I’ve been thinking about lately. China holds $1T+ USD treasuries. They can ONLY buy things that are denominated in USD with that money. They’ve learned recently that buying commodities is not a great answer because when they enter the markets they drive up the cost of the commodities they are trying to purchase. Plus, storing that stuff risks taking a huge lose as the price readjusts (copper, for example). They can buy US companies with their reserves. But they’ve hit several brick walls because any strategic company they want to buy requires a blessing from the US government. Perhaps what they’d really like is an alternative currency they can exchange those USDs for — something more convertible — gold perhaps? Could it be that the Chinese have been lobbying our most naive politicians to be more responsible — and what could be more responsible than a Balanced budget amendment? Well, to people who don’t understand sovereign fiat monetary theory, I guess a balanced budget and maybe even the reinstatement of the Gold Standard sounds like a prudent move. USD reserves can also be used to lobby Congress and the Chinese would be very happy to exchange their reserves for gold if they could.

  81. A7L-B says:

    Peak Credit…

    Credit-climate Change.

  82. [...] – We see your five questions and raise it to 10. [...]