Monday, January 17, 2011

Down Grading U.S. Treasuries? Is This A Joke?


There has been talk lately that the credit rating agencies may lower their rating on U.S. Treasury Notes and Bonds. I find this such a joke. Just a few years ago, these same credit rating agencies placed their triple-A rating on some of the biggest junk mortgaged-backed bonds that ever came out of Wall Street, but now they are going to come down on U.S. debt obligations and possibly lower them to double-A?

The three major credit rating agencies should have been prosecuted years ago for their corrupt culture of selling credit ratings to maintain their growth in earnings. I still think they should be prosecuted today.

The problem is that credit ratings system is not widely understood, and its function in the debt markets is really only appreciated by those that deal with it on a day to day basis.

I have written several times over the years (2008, 2009, 2010), that without the triple-A credit rating, Wall Street investment bankers could not have sold the mortgaged-backed bonds to portfolios around the world and that without access to institutional investors (pension funds, foundations, endowments, mutual funds and sovereign wealth funds) that the housing bubble would have been unlikely. Bubbles require a substance to inflate them. For the housing market, that substance was the money that was invested in mortgaged-backed bonds. Without the buyers of these bonds, housing could not have produced the bubble that eventually burst when the investment bankers started betting against the very mortgage-backed bonds that they were selling to the public. These bets against the mortgaged-backed bonds became known as credit default swaps. This then lead to the meltdown of the mortgage-backed bond market, which lead to the financial panic for liquidity and finally the economic recession. With all the reform measures that have been taken, nothing has changed as to the way the credit rating agencies to business.

Stay tuned.

1 comment:

LceeL said...

And the investment bankers that held those Credit Default Swaps? They made Billions. And no one says a word ....