Subprime Meltdown Redux?
September 3, 2011 2:17 PM   Subscribe

Experts Question Ratings After S&P Gives Subprime Bonds Higher Rating Than U.S. Debt Influential investors are scratching their heads over a little-noticed development: After downgrading the country's credit rating, Standard & Poors is continuing to award AAA status to the same class of assets that nearly blew up the world economy three years ago. From Bloomberg: "S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties." In other words: U.S. Treasuries -- widely believed to be the safest investment in the world -- don't make the cut, but subprime mortgage investments do? What gives? More Inside...
posted by noaccident (13 comments total)

This post was deleted for the following reason: single link talking points memo editorialized. Maybe make a more MeFi-like post about this important issue? -- jessamyn



 
I just assumed it was because the head of the company that owns S&P is a stalwart Republican who has instructed his businesses to do what they can to bring Republicans back to power, despite half-hearted denials.
posted by infinitewindow at 2:20 PM on September 3, 2011 [1 favorite]


I just assumed it was because S&P is more interested in enriching themselves, their clients, and their cronies than they are in accurately rating anything.
posted by dersins at 2:25 PM on September 3, 2011 [1 favorite]


I just assumed it was because the head of the company that owns S&P is a stalwart Republican who has instructed his businesses to do what they can to bring Republicans back to power, despite half-hearted denials.

Except the S&P press release which announced the US downgrade specifically called out Republican opposition to revenue increases.
posted by Sticherbeast at 2:25 PM on September 3, 2011 [1 favorite]


I just assumed it was because S&P is more interested in enriching themselves, their clients, and their cronies than they are in accurately rating anything.


This.
posted by elwoodwiles at 2:31 PM on September 3, 2011


In the last year, which came closer to blowing up the world economy by defaulting on its obligations -- tranched subprime debt or the US government?

Oh yeah.
posted by unSane at 2:32 PM on September 3, 2011 [1 favorite]


So pretty soon the world will just stop paying attention to anything S&P says, their stock-in-trade being their ability to rate asset risk, right? I mean, who rates the raters?
posted by axiom at 2:33 PM on September 3, 2011 [1 favorite]


Ummm...where's your "more inside"?
posted by NoMich at 2:35 PM on September 3, 2011


Raters gonna rate.
posted by unSane at 2:38 PM on September 3, 2011 [3 favorites]


S&P aren't consistent and the downgrade was probably partially payback for politicians not falling into line. But that doesn't mean they're wrong.

We have top-level politicians welcoming default who seem interested only in smashing the federal government in whatever ways possible, including smashing its full faith and credit.
posted by airing nerdy laundry at 2:41 PM on September 3, 2011


If you want to work on wall street but can't get a job at the high paying big firms then you go to work at Standard & Poors.
posted by solmyjuice at 2:42 PM on September 3, 2011 [1 favorite]


widely believed to be the safest investment

I've heard this before, but wouldn't that reflect in the rates on bonds? Because at the moment -- if I'm interpreting this correctly -- Japanese and Swiss bonds are considered safer, so can we please stop this hyperbole? They're safe, yeah probably, but not the safest in the world.
posted by Marcc at 2:42 PM on September 3, 2011


In 1990, ~20% of debt was AAA, now 70% is rated AAA. If this trend continues, all investments will be risk free by 2020:

The horrifying AAA debt-issuance chart
Triple-A debt wasn’t a huge part of the bond market back in the early 90s, but for the past decade it has invariably accounted for somewhere between 50% and 60% of total global fixed income issuance. That’s possibly the most horrifying bit of all: it simply defies credulity for anybody to be asked to believe that more than half the bonds issued in any given year are essentially free of any credit risk.

posted by 445supermag at 2:49 PM on September 3, 2011


S&P had a pessimistic view of the US economy for a while. By the time of the debt ceiling crisis, S&P had said that tax revenue had to increase or they would downgrade the US rating. They were boxed in by their own threat. But more important is this: (from the first link) "I'm trying to sort out why debt backed by the ability to tax in the United States is rated lower than securities that are backed by no particular ability to have additional revenue," John Milne, CEO of JKMilne Asset Management[.] Well precisely because S&P is concerned about the US government's ability to tax, or as they put it in the downgrade announcement: "...the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011. Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon."

So S&P is concerned with the ability of the US to increase revenue and/or effectively manage the economy. This was a shot across the Tea Party's bow and a warning that the folks who want to "drown government in the bathtub" are controlling this issue. Now, why they gave triple A to a crap bond issue is another story...
posted by CCBC at 2:49 PM on September 3, 2011


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