Blame the Ratings Agencies Redux

The irony about the S&P downgrade on the outlook for U.S. Treasuries from “stable” to “negative” is that the White House downplayed this as no big deal and ultimately a political commentary, yet just last year the President enthusiastically signed into law the Dodd-Frank financial reform bill, which among it’s many (many) provisions included language that sought to regulate ratings agencies by making them subject to legal action for misleading forecasts and ratings.

The rationale that Dodd-Frank provided is that ratings agencies had to be held to high standards through the threat of legal action that would subject them to punitive financial consequences for failing to apply thorough review processes as a backbone to their ratings products… so the question that should be asked of this Administration what is it, are the ratings agencies wildly speculative in spite of the consequences spelled out in Dodd-Frank or do they have a point? While it could be argued that the S&P action is a little late considering the world’s largest bond fund dumped their entire position in U.S. Treasuries 5 weeks ago.

The fact remains that elected officials love to complain that ratings agencies are in bed with corporate interests when it comes to ratings and therefore have a flawed system for analysis… yet when the tables are turned and these same agencies are critical of government backed bonds then the agencies are, according to these same elected officials, being unreasonably stringent in their application of analysis and methodology.

CalPers, which is at it’s core just another form of government entity for all practical purposes, sued a range of bond rating agencies in 2009, and then in the very same year CA Treasurer Bill Lockyer climbs up on the soap box to decry the poor ratings that agencies were giving CA bonds, complaining that poor ratings were costing the state untold millions in additional interest payments. Hypocrites… all of them.