#1 When Credit Ratings Lose Their Meaning
Posted: Sat Sep 03, 2011 6:38 pm
Businessweek
[quote]Which is a safer investment: (A) Treasury bonds, backed by the full faith and credit of the U.S. government, or (B) securities backed by subprime loans, the same type of investments that led to the worst financial crisis since the Great Depression? For ratings company Standard & Poor’s, the answer is B.
S&P stripped the U.S. of its top grade, AAA, on Aug. 5, saying Washington politics was making the country less creditworthy. Meanwhile, the company has stamped AAA on more than $36 billion of U.S. securitized debt this year, according to data compiled by Bloomberg. Overall, some 14,000 securitized bonds, backed by everything from houses and malls to auto-dealer loans, carry the AAA rating from S&P. They are created by bankers who gather thousands of loans, package them into bonds, slice them into pieces of varying risk, and pay ratings firms a fee to evaluate them. S&P is not paid for rating U.S. government debt.
S&P justified its downgrading of the U.S., which, unlike corporations, has the authority to set tax rates and print money, by saying politicians are becoming “less stable, less effective, and less predictable.’’ That logic puzzles some investors. “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,â€
[quote]Which is a safer investment: (A) Treasury bonds, backed by the full faith and credit of the U.S. government, or (B) securities backed by subprime loans, the same type of investments that led to the worst financial crisis since the Great Depression? For ratings company Standard & Poor’s, the answer is B.
S&P stripped the U.S. of its top grade, AAA, on Aug. 5, saying Washington politics was making the country less creditworthy. Meanwhile, the company has stamped AAA on more than $36 billion of U.S. securitized debt this year, according to data compiled by Bloomberg. Overall, some 14,000 securitized bonds, backed by everything from houses and malls to auto-dealer loans, carry the AAA rating from S&P. They are created by bankers who gather thousands of loans, package them into bonds, slice them into pieces of varying risk, and pay ratings firms a fee to evaluate them. S&P is not paid for rating U.S. government debt.
S&P justified its downgrading of the U.S., which, unlike corporations, has the authority to set tax rates and print money, by saying politicians are becoming “less stable, less effective, and less predictable.’’ That logic puzzles some investors. “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,â€