Credit rating agencies certainly played a willing role, but if you are looking for someone to blame, I am afraid its gotta be the state: http://mises.org/story/3263

After all, who monopolises the money and who sets the interest rates?

“At a domestic level, political party pressure groups like Compass and the LRC might want to get involved with calls upon the government to investigate the way a private company like S&P can apparently get away with giving orders on how the economy should be run on behalf of investors, rather than everyone.”

What on earth does that mean? What orders do they give, and who obeys them? Credit rating agencies have influence only to the extent that people pay attention to their ratings, people are quite at liberty to invest in debt instruments without paying the blindest bit of attention to them, aren’t they?

Let’s say we abolish credit rating agencies, and ask all entities that invest in debt to go to the expense of estimating its likelihood of repayment for themselves. Is that what you’re suggesting? Don’t some investors already spend money on their own debt research departments … don’t hedge funds do that sort of things already?

How does attempting to grade the likelihood that a debt will be repaid translate to “giving orders on how the economy should be run on behalf of investors, rather than everyone”? Obviously, if those estimated probabilities turn out to be badly wrong, and a lot of people acted upon those estimates, then that can be disastrous and against the interests “of everyone”, and if these credit rating agencies were better at their jobs, that would be in the interests of everyone, but you seem to be saying something else entirely – exactly what I cannot fathom.

Thanks for this piece, I like what you are saying very much.

I totally agree that there needs to be more focus on the credit rating firms. I think they need to be made accountable for what happened in the past as well as reformed to ensure that they can’t offend again.

The quote in the S&P report about the “unforeseen development” is the big lie, which the whole system is focussed on repeating enough times for it to become true in the public mind. It was foreseen by many, including Goldman Sachs who got out of subprime about 6 months before the house of cards collapsed.

Hiding behind this lie is real corruption, specifically the credit rating agencies’ role in the series of “pump & dump” bubbles of the past ten years. S&P’s management should be in jail now, but can we find the rap to nail them on? We seem to meekly accept that anyone in the City of London is above British law, and rely on the American authorities to bring forward prosecutions (although the honey trap set for Eliot Spitzer shows what happens to those making real progress). The “Serious Farce Office” barely exists in the mainstream media’s consciousness, just something in the dense back pages of Private Eye.

If the official authorities won’t do the job then we need to bring some charges forward in the court of public opinion. I would like to see more information out there on the individual personalities at the top of these organisations, what they did, when, and how that squares with their public statement that this was unforeseen.

Strategist,

If you are saying that the rating agencies, in return for getting given other business from banks, gave erroneously positive ratings to certain debt instruments, and the banks used those ratings to sell the debt to credulous investors, who were duped by the positive ratings, then at least that’s a coherent story and something that, if true, people should get prosecuted for. And there is a broader point that part of the problem was that individual agents did have incentives not to look to closely at what they were doing, keep going while the going was good, for sure.

The deliberate collusion story is somewhat undermined, however, by the fact that rather than sell the debt instruments on to credulous investors, the banks kept these debt-securities as their own assets, which is how they ended up bankrupting themselves. Also, a credit rating agency would I imagine think twice about knowingly issuing false ratings, because if they get a reputation for doing that, that would be an act of commercial suicide (would you pay somebody for credit ratings, if you thought they were bullshit?). I’m not saying it (fraud) didn’t happen, but it’s quite possible that the credit rating agencies were simply as mistaken as everybody else.

“What orders do they give, and who obeys them? Credit rating agencies have influence only to the extent that people pay attention to their ratings, people are quite at liberty to invest in debt instruments without paying the blindest bit of attention to them, aren’t they?”

Exactly. The aim of what Paul is suggesting is that people don’t pay attention to Standard & Poors, and recognise that they are a discredited organisation advancing an ideologically motivated agenda to benefit a wealthy minority at the expense of the rest of us. Problem is that at the moment they get reported as if they are disinterested and impartial experts making a technical judgement about economic policy.

An analogy. Supposing the newspapers and TV broadcasters reported resolutions from the TUC conference as if the economy would collapse if they were not implemented, and suggested that the TUC were the official and impartial voice of all British workers. Regardless of the quality of the policies suggested, that would skew the policy discussions.

The problem with credit rating agencies (or one of them at least – I don’t wish to deny that there are others) is that they became, in a way, quasi-official arms of the state. Look at this wikipedia article – http://en.wikipedia.org/wiki/Nationally_Recognized_Statistical_Rating_Organizations – for instance: it’s a great example of how government intervention can bestow a competative advange on some market participants, and thereby stop any meaningful competition. It doesn’t really matter that S&P is discredited, because their ratings still recieve the official seal of approval from the SEC.

Now I’m sure the usual crowd will take this as evidence that the government should be running the whole show, and that leaving these things in private hands is always a bad idea. But the lesson is much more subtle than that – it’s that free markets are reasonable fragile things, and the bestowal of government priviledge to one group of firms may well have huge and negative unintended consequences. (The discussion here: http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflation-now/ on privatization and de-regulation is excellent).

Now if only people realized that the same lesson applies to the banking sector…

Luis Enrique

“Credit rating agencies have influence only to the extent that people pay attention to their ratings, people are quite at liberty to invest in debt instruments without paying the blindest bit of attention to them, aren’t they?”

I would argue that credit ratings agencies have a tremendous influence, and ultimately seek to use it for political purposes.

For example, it was (partly) due to the frothings of various ‘respectable’ institutions that (erroneous) fears over the security of Canadian government debt somehow ‘justified’ Chrétien’s deep cuts to social welfare programs in 1993.

This – and other dubious practices – are exposed in Naomi Klein’s ‘The Shock Doctrine’.

I think the current financial crisis is likely to be the catalyst for another round of government cuts. No doubt a lot of ‘waste’ will be disposed of (trimming down the bloated bureaucracy so beloved of New Labour), but I’m sure a right-wing government will also attempt to dismantle what remains of our functional welfare state.

Also consider the following (any paper will do): http://www.guardian.co.uk/business/2009/jun/22/larry-elliott-british-credit-rating

“… the announcement on 21 May that the credit rating agency Standard & Poor’s had put the UK on negative watch received less attention than it might have done.

Being put on negative watch is a warning to the Treasury that the rating agency wants a credible plan in place for reducing government borrowing. Otherwise, it will downgrade Britain’s sovereign debt, which it currently rates at the maximum, AAA.

Losing an AAA rating involves more than simply a loss of face. The interest rate Britain has to pay to borrow in the global markets depends on how credit­worthy the country is perceived to be: the higher the rating, the lower the borrowing cost.”

If S&P downgrades Britain’s soverign debt – which I happen to believe is unlikely (Gordon Brown would first sell the country to maintain the illusion of fiscal prudence) – the impact on government expenditure would be catastrophic.

This absolutely affects all of us, and I do believe that the power of institutions such as S&P, that are otherwise quite hilariously incompetent / also deeply enmired in fraud, should be checked.

If S&P downgrades Britain’s soverign debt – which I happen to believe is unlikely (Gordon Brown would first sell the country to maintain the illusion of fiscal prudence) – the impact on government expenditure would be catastrophic.

If that happens it will be as a result of events of which the markets will already be very well aware. There will be no “catastrophe” – other than to the tattered remnants of Brown’s reputation.

Japan’s rating was downgraded a while ago from AAA to AA, and government bond yields there are 2% – half the level of ours.

None of this means that there won’t be a problem with UK bonds, or sterling, or both. But if our rating is downgraded it will be the result of those problems, not the cause.

On the post’s own suggestions:

(a) why not, but so what?
(b) whose bonuses, and how exactly would this be enforced?
(c) it will re-emerge in another guise

“Exactly. The aim of what Paul is suggesting is that people don’t pay attention to Standard & Poors, and recognise that they are a discredited organisation advancing an ideologically motivated agenda to benefit a wealthy minority at the expense of the rest of us. Problem is that at the moment they get reported as if they are disinterested and impartial experts making a technical judgment about economic policy.”

You what? He’s suggesting that people march on Canary Wharf and that the government “investigates” how S&P “issue orders”, he’s not writing an article appealing to professional investors to place less faith in S&P. The people who may or may not pay attention to S&P analysis are people who are buying, I dunno, government bonds, corporate bonds, or securitized loan books. If S&P has destroyed its own credibility, they’ve either done so or not done so by now, I’d have thought – are you suggesting that through some sort of political action on the part of the left wing, the people who invest in emerging market government debt are going to suddenly have the scales fall from their eyes, and realize that S&P ratings are unreliable? Like, in some way they don’t already know?

S&P may issue pronouncements about what economic policies it believes will, or will not, make governments more (or less) creditworthy – where’s the “ideologically motivated agenda to benefit a wealthy minority at the expense of the rest of us”? They’re talking about what they see affecting the probability that the government is going to be able to repay its bonds …. S&P’s analysis might be spot on, or it might be a pile of cack. Let’s say it’s cack – who are the wealthy minority that benefit from this? Talk me through it – S&P says the govt needs to cut spending if it wants to protect its credit rating but the truth is that the high govt spending will not materially reduce the probability of it being able to repay its bonds. S&P are wrong. Now what? Who is the “wealthy minority” that benefits from this faulty analysis? Let’s say it’s people who invest in government bonds (and ignore the fact that most of us, via pension funds, building societies etc. all hold govt bonds) – how do they benefit? The market is spooked by S&P and the price of bonds falls! no, wait, that doesn’t help bond holders. Aha, let’s say the govt listens to S&P and cuts spending and the price of government bonds holds up! yes, that benefits existing holders of bonds … although it also helps the taxpayer by enabling the govt to borrow at a lower interest rate … but then poor suffer from falling govt spending ….. is that what you have in mind? But it’s not obvious that high govt bond prices are especially important to the wealth of the wealthy minority, (they mean lower returns on future bond purchases, after all) nor that cutting govt spending helps the wealthy (don’t industrialists also benefit from govt fiscal stimulus?) and it’s not obvious that the govt pays much attention to S&P recommendations, is it? I suppose if it looked like the govt’s credit worthiness was really in doubt, it would worry … but in those circumstances, it would be right to.

The effect of S&P’s pronouncements is ambiguous: it might cause bond prices to fall, or it might cause the govt to change its behavior with bond prices the beneficiary …. it’s not obviously the most potent weapon the wealth minority has against the rest of us. There’s some barking up wrong trees going on here, I think.

Luis knows what he’s talking about; Paul doesn’t.

9 – the campaign wouldn’t be aimed at investors.

Senior Tories such as Philip Hammond describe the ‘sword of Damocles’ that is Standard & Poors who will reassess the UK’s credit worthiness in 2010 having already put it on notice. It is a major part of the Tory case for public spending cuts that Britain is compelled to cut spending on the recommendations of the credit rating agencies.

The aim of the campaign would be political – to make people aware that the Tories think that economic policy should be decided by the same people who helped cause the problems in the economy.

“There will be no “catastrophe” – other than to the tattered remnants of Brown’s reputation.”

I understand that if Britain’s government debt is downgraded, it will have to offer higher yields to compensate investors for increased risks… This presumably translates into higher taxes (or lower spending), as the cost of servicing debt increases.

The cost of servicing the national debt is already forecast to rise to over £50 billion by 2013 / 2014 (National Institute of Economic and Social Research).

Whilst the (potential) downgrade may be the result of existing problems – and may, of course, already be discounted by the market – such an action would inevitably have far-reaching consequences.

As regards the “wealthy minority” who stand to benefit from any downgrade, and / or associated spending cuts: there is clearly a huge financial opportunity in dismantling the welfare state.

Only recently, the ‘Insurance Industry Working Group’ (chaired by Alistair Darling and industry bosses) advanced the idea that insurers might take over responsibility for benefits such as sick pay. Naturally, consumers would pay for this service – and another state benefit is lost.

The lines between the public and private sectors are already very blurred in health and education. Further ‘opportunities’ no doubt exist here.

The government will be ‘forced’ to cut spending under threat of a downgrade which would cost taxpayers millions in increased debt-servicing costs, as borrowing continues to rise.

You have the causality the wrong way round.

The cost of UK sovereign debt is driven by the market, not in any meaningful way by the rating agencies.

Any downgrade will have been reflected in UK yields long before it occurs.
There will be no “far reaching consequences” therefore.

This does not mean that yields will not rise – they may well do.
But they won’t do so as a result of a downgrade, and any downgrade will come after most of that rise has already happened.

Don, you must be reading another article than me.

Well fine, start a campaign to point out that the Tories are wrong to worry about the UK’s credit rating (there is, after all, no real sign that investors are worried about the UK credit rating), and point out that S&P ratings are of dubious value … but the fact is that UK’s cost of borrowing is determined, among other things, by how the people who buy government debt perceive government creditworthiness, and the people involved in that are “the people who helped cause the problems in the economy” and I’m not sure how much a left-wing campaign to devalue S&P credit ratings is going to change anything. Perhaps just pointing out “The Tories are listening to these idiot bankers” will score some points, I don’t know.

@4 Luis. “the rating agencies, in return for getting given other business from banks, gave erroneously positive ratings to certain debt instruments…something that, if true, people should get prosecuted for”

The possibilities appear to be:

1) They gave high ratings to junk (“certain debt instruments”) they didn’t understand because (a) they are incompetent at the trade they profess to be experts in or (b) because they deliberately didn’t look at the junk too carefully for fear of what they might find, and upset their paymasters the banks.

2) They deliberately gave high ratings to junk as part of a crooked plot with the originators of the junk.

I think prosecutions could be brought for any of the above crimes, although they vary in severity. My guess is that 1b is true, and something must be done not only about making sure that the system is reformed so that it can’t happen again, but to ensure that those responsible for committing the offence be brought to justice. I think criminal charges are justified because 1b is effectively no different from 2 but if we can’t make them stick, couldn’t we all sue them in a class action suit?

What is definitely a lie is (3) Nobody knew or could have known that they were junk. This is the lie they are trying to spread about. You are wrong that “the fact that rather than sell the debt instruments on to credulous investors, the banks kept these debt-securities as their own assets, which is how they ended up bankrupting themselves” and “it’s quite possible that the credit rating agencies were simply as mistaken as everybody else”.

The fact is that the stupid banks thought they were meaningful assets (those with Scottish management appear to have been particularly prone to this), but the intelligent banks got the hell out of subprime junk as the bubble looked ready to burst. The fact that they may have only been one intelligent bank in the whole of Wall Street (Goldman Sachs) is beside the point. Lots of independent analysts were shouting bubble and the fact that it was a bubble was completely obvious to me as a casual observer of the scene. You define “everybody” in the same way as some kind of airheaded socialite. In fact there were lots of people who saw it but they were “nobodies” and there were an elite few behind the mirror glass in the heart of the casino who also saw it and made an unbelievable amount ofmoney out of it.

@15, the fact that there’s no such thing as a “certain debt instrument” detracts a little from your attempts to position yourself as someone who knows what the hell he’s talking about.

The credit rating agencies gave high ratings to the safest tranches of US mortgage CDOs because up until 2007, everyone thought they were safe.

The reason everyone thought these tranches were safe was that, in order for their investors to lose their money, the default rate on the pool of mortgages covered by a particular CDO would have had to exceed 25% (which, effectively, meant a 25% drop in house prices nationwide). That had never been seen before in the US, and nobody [*] believed it could happen.

Your claim seems to be that a few months before everything went horribly wrong, Goldman Sachs noticed that there was more chance of a 25% nationwide fall in house prices than everyone had previously thought – therefore everyone else (and presumably even GS before that date) was criminally negligent or worse.

But the saner interpretation is that GS hires large numbers of incredibly smart people, pays them crazy amounts of money, and makes damn sure that its interests are well-represented across policymaking institutions, precisely so that it can get that few months’ lead on everyone else…

[*] ie nobody credible. Yes, lots of ‘nobodies’ saw it – but in a world where there are millions of nobodies with blogs, it’s hardly surprising that some of them turned out to be right, in a Shakespeare-monkeys kind of way.

@15 JohnB; “certain debt instrument” was Luis’s term, not mine, and I put it in quotes. So you have detracted a little from your own positioning to purport to be someone who know what the hell he is talking about.

Your argument that “nobody credible believed a 25% drop in house prices could happen” is obviously wrong. There was perhaps nobody who didn’t think we were in a bubble and that there would be a massive correction at some point. And that included people unaware of the ludicrous practices in the US subprime market, so God knows how obvious it was to everyone in the know about that.

I think what happened is that all these cocaine-fuelled wiseguys thought they would be able to call the top of the market better than everyone else and get out at the right time.

I have on my shelves a book by Fred Pearce, published in 2005, called “Boom Bust: House Prices, Banking and the Depression of 2010″. He predicted pretty much all the events we have seen. You may call him the monkey who accidentally knocked out Shakespeare, but a saner interpretation would be that there is a systematic flaw in the way you & the rest of the establishment deem some “credible” and others not.

“certain debt instruments” as in “certain people” (some people)

“c) The abolition of the credit ratings industry as we know it.”

Err, what? That’s a pretty wild recommendation to be given with exactly zero explanation or reasoning.

There was perhaps nobody who didn’t think we were in a bubble

Agreed this far.

and that there would be a massive correction at some point.

But that doesn’t entail “>25% drop in US house prices”. It could entail “house price growth at 0% for 5 years, until earnings/mortgage payment ratios return to historical levels”. Or it could entail “10% drop in house prices”, which wouldn’t have busted most of the AAA-rated CDOs.

20. john b. Some people in Goldman started shorting property in 206 or 2007, been articles in press. Also, read somewhere that JP Morgan started derrivatives but moved out of the housing market when they saw where it was leading.

Soros was warning of debt for some time. Some bank have survived – Goldman, JP Morgan, Barclays, HSBC and the some of the Spanish ones. It suggest some of the bankers and hedge fund managers saw what was happening and bailed out in time.

If we look at the UK RBS, HBOS, Northern Rock and Bradford and Bingley ignored the risks in the housing bubble, Barclays, HSBC and Lloyds had minimal losses and those in property such as Hunt of Foxtons, Ronson, founders of Berkely and Redrow sold out in time.

Perhaps we should be asking as to why some people saw the bubble was going to collapse and others did not: which if this is the case, makes S and P even more culpable.

@20 JohnB, your info that the whole system had a maximum tolerance of a 25% drop in house prices is interesting, but I’m struggling with the idea that such a drop was inconceivable. The bubble was inflating at approaching 25% a year, so why wouldn’t it deflate faster upon bursting? The idea that the correction would take the form of a pause for a few years whilst salaries caught up I always took to be bullshit put out by estate agents. And I’m sure I recall bears like Roger Bootle predicting greater drops than that.

Turning back to Standard & Poors. Either they knew about the malpractice going on in subprime, in which case they shouldn’t have thought 25% inconceivable or they didn’t know what the products they were rating consisted of, in which case they shouldn’t have issued a rating. Either way, they were at fault and the heads of their directors should be mounted on spikes at the gates of the City.

So far as the ratings agencies performance in the general financial markets is concerned, the problem came predominantly not with generic over the counter derivative products – the rating of which is more or less straightforward – but with the more complex products, such as fully synthetic CDOs (ie a product made up of a bundle of assets, each of which was itself made up of a bundle of assets).

Since it is literally impossible to calculate the underlying risk on each individual asset that makes up such a CDO (often impossible even to identify them) the rating agencies (and I don’t know why Paul focuses on S&P to the exclusion of Moody’s and Fitch) relied on highly sophisticated (so they thought) computer models in order to calculate the correct ratings.

They did this so mechanistically that, back in the days when I used to help draft these things (from a legal, not a financial perspective…) the agencies could turn a trade (that had taken maybe three weeks to put together) around in a matter of a few hours. Obviously their reliance on modelling made the ratings vulnerable to highly unusual events. When LTCM went bust back in the day, their models had rated the likeliness of the circs that brought them down as a 1 in a 1000 year event. When the US property market collapsed, this affected not simply the straightforward derivative trades, but also most of the CDO market, since no-one could be sure where the poison was.

Systemic errors and weakness then, but the suggestion that this was collusion is probably a bit much. And to propose the ‘abolition of the credit rating industry’ is simply not serious. It will always exist, for the simple reason that lenders need to know how trust-worthy the borrower will be. If you ‘abolish’ the current system (and how, for God’s sake? It’s a cross border industry that doesn’t rely on any one set of laws) a new version will replace it almost instantly. Good job too, because if it didn’t the entire global debt capital markets would seize up (even more than they already have).

As for the rating agencies giving of ratings to sovereign debt, this is more a reflection of reality than a prediction, still less a game-changing event. It’s like blaming weather-forecasters for tomorrow’s lousy weather.

Nick: but if you are looking for someone to blame, I am afraid its gotta be the state

This is getting rather boring and predictable isn’t it? The companies price risk wrongly, and repeatedly, and the credit agencies don’t actually bother assessing that risk properly – and all you do is still blame the govt.

I suppose they shouldn’t have bailed out CitiGroup either?

Luis Enrique:
I’m not saying it (fraud) didn’t happen, but it’s quite possible that the credit rating agencies were simply as mistaken as everybody else.

Well then that points to a deeper problem doesn’t it? You can argue that companies themselves were bad at assessing risk. You can also argue that the companies themselves didn’t offer enough information to let companies like S&P to assess that risk.

But to argue that credit rating agencies were as mistaken as anyone else (why?) suggests that none of these people can actually understand what the hell they’re doing.

Don Paskini: The aim of the campaign would be political – to make people aware that the Tories think that economic policy should be decided by the same people who helped cause the problems in the economy.

I thnk this is a key point.

There is a market for credit ratings agencies no doubt. I think Paul is mistaken in calling for them to be shut down. Govts certainly cannot do that job.

But there is a central point still being missed: why didn’t S&P’s reputation not take more of a hit given they fucked up so monumentally? And why were they unable to assess those risks properly?

They are part of the system-wide failure.

“Systemic errors and weakness then, but the suggestion that this was collusion is probably a bit much. And to propose the ‘abolition of the credit rating industry’ is simply not serious. It will always exist, for the simple reason that lenders need to know how trust-worthy the borrower will be. If you ‘abolish’ the current system (and how, for God’s sake? It’s a cross border industry that doesn’t rely on any one set of laws) a new version will replace it almost instantly. Good job too, because if it didn’t the entire global debt capital markets would seize up (even more than they already have).

As for the rating agencies giving of ratings to sovereign debt, this is more a reflection of reality than a prediction, still less a game-changing event. It’s like blaming weather-forecasters for tomorrow’s lousy weather.”

What I wanted to say.

Sorry, I’m late in on this discussion – been out all day. I can’t really hope to cover all comments, but to pick up a couple.

Don, you must be reading another article than me. (Luis #14): In fact Luis, I think Don has been reading a different article from the one you were reading, as he may well have read my much fuller post at my blog, from which this is heavily edited. Don is right that my aim is primarily political, and not aimed at investors, who can as you say do what they want with S&P or Moody’s info. I do think this edited post loses something of that, focused as it appears to be on the more technical stuff, and drawn that way by the comments. What I’m interested in is showing up the power imbalance which allows S&P to get away with what they did, and then make policy recommendations to government which are about slashing public services and hitting those a million miles away from your investors. My fuller article is about exposing such hypocrisy at the heart of the financil system as a way of attacking the heart of capitalism, and is aimed fair and square at colleagues on the left.

Similarly Kentron @19, my rationale and explanation are set out in my fuller article, where I do suggest, tentatively, a replacement system of credit rating likned to UN principles of SRI and such like, though I don’t expect that to happen any time soon. In fact (Sunny @24) I”m not calling for them to be shut down in totality (at least as capitalism exists in its current form) and be replaced by government necessarily, just by a more balanced method of credit assessment.

Even S& P calls for the rating industry to be regulated and for its assessments to be seen as only one part of a wider view, though it is remarkably (and deliberately) vague about this. In the report I reference above, they themsleves say:

‘Rating agencies that use ‘warning signals’ whenever possible, such as S&P’s CreditWatch and Outlook signifiers—to signal to the marketplace potential future rating changes—are important to investors. However, rating users need to understand that ratings can change suddenly based on market or industry-specific events. This possibility is a reason that regulators might carefully reconsider using ratings exclusively in their regulations.’

I’d like to take them absolutely at their weasily word.

“The abolition of the credit ratings industry as we know it.”

Interesting idea.

So, the UK Govt has to borrow £175 billion of new money this year, as well as roll over some amount of old debt. And your suggestion is that investors should not be allowed to hire people to ask how likely they are to get their money back if they lend it to the UK Govt?

Or to be more precise in who pays those ratings agencies, the Govt cannot pay people to tell investors how likely they are to get their money back?

Certainly an interesting way of increasing the liklihood of the Govt being able to borrow the money.

Bit like telling a bank that they cannot access your credit report when deciding whether or not to grant you an overdraft. You know, cannot use an outside expert.

Can’t see that it’s the solution to all our problems quite frankly.

So let me get this straight.

S&P gave CDOs a triple A rating.

And they are now giving the UK a triple A rating.

Ah yes.

I see now.

“your info that the whole system had a maximum tolerance of a 25% drop in house prices is interesting, but I’m struggling with the idea that such a drop was inconceivable.”

It had never happened before and thus yes, in the minds of those in the market it was inconceivable.

The US housing market has always been a series of local and regional ones, not one great big national one. Indeed, even now it’s not national. Houston for example, did not have a huge rise and hasn’t had a bust.

It was rational (even if incorrect) to think that you wouldn’t see a national implosion, for there wasn’t in any real sense a national market. Even with what’s been happening it’s still true that the real boom and bust was in only five states: CA,NV,FL, I think AZ and cannot remember the fifth.

“Even with what’s been happening it’s still true that the real boom and bust was in only five states ”

That’s not what I’ve been reading about whole black neighbourhoods across major US rustbelt cities literally wiped out by subprime defaults & foreclosures.

“in the minds of those in the market it was inconceivable”

Not necessarily conceded, but if we do so for the sake of argument, how do you feel about those people still being in business and making a fortune again, whilst we who weren’t “in the market” are ruined?

Not necessarily conceded, but if we do so for the sake of argument, how do you feel about those people still being in business and making a fortune again, whilst we who weren’t “in the market” are ruined?

The McGraw Hill Companies (parent of S&P, which is its most profitable business) has seen its share price halve compared to two years ago. S&P has laid off 10% of its staff. Meanwhile, GDP in the UK and US has fallen by about 5%. That would seem to imply that, rightly, S&P is taking a harder hit than “we who weren’t in the market”…

“That’s not what I’ve been reading about whole black neighbourhoods across major US rustbelt cities literally wiped out by subprime defaults & foreclosures.”

There are indices of house prices for a number of major metropolitan areas. Case Shiller indices. Worth having a look at them. You will see that some areas really rather didn’t have a boom, some very much did.

More specifically to the above, rustbelt cities are in decline anyway (the name’s a clue) and, however much this shouldn’t be so, the black areas are the poorer ones in them. That poor areas of declining cities suffer in a recession is not exactly a surprise: we would not have to posit a housing boom and bust to see that now, would we?

What is the “hypocrisy at the heart of the financial system”? Is it that having been wrong so badly so recently, S&P ought not have the temerity to pronounce on credit risks? Bit difficult for them to avoid that, being a credit rating agency. But I can’t see what else is meant.

“But to argue that credit rating agencies were as mistaken as anyone else (why?) suggests that none of these people can actually understand what the hell they’re doing.”

We already know that the credit rating agencies and the banks got things badly wrong – despite all the rhetorical strutting around, I can’t see that anything has been added to that.

And, does it make sense to complain that S&P should have been more worried about risks when it came to mortgage backed securities, and then to complain that S&P should be less worried about risks when it comes to government bonds?