I continue to be amazed at how much credibility we seem to give this (and other) rating agency after they rated subprime-backed derivatives as safe, rated AIG & Lehman as safe. Is our collective short-term memory non-existent?
A track record is important in determining credibility. Their long term (decades) track record may be fine, but their short term (past few years) track record is suspect. This may be legitimate and above board, but it is difficult, and with good reason, to believe that this is so.
You're right, but the good thing is that nobody is really giving S&P that much credit here. Yields on new gov't debt haven't risen significantly. Sure, people say if Fitch and Moody's raise them then it'll trigger sell-offs from institutional investors.
Thing is though, the institutional investors who have policies of holding x% AAA debt can always change those rules. Because there's only so much AAA debt out there -- that's why it would be kinda bad for everybody if the US Gov't didn't carry ANY public debt.
Suppose you're a fund manager of a huge fund with $40bn under management. A full 1/4 is T-bills. Your mandate is to hold 1/4 of your fund in AAA debts. Well -- where do you put than 10 billion?
I can see many funds saying -- "look, the ratings agencies did their thing. But the world is no different today than it was yesterday."
This is especaially true because all these buyers of AA+ US Debt would stand to make a good bit more $$ than they would've before as the markets use these ratings agencies to justify increased yields.
But even that is not guaranteed because the debt is sold at auction. If there are enough buyers willing to buy at current yields, then sweet. And there may be because in this climate, if you're that fund manager, you desperately cling to safe havens like US public debit.
>You're right, but the good thing is that nobody is really giving S&P that much credit here. Yields on new gov't debt haven't risen significantly. Sure, people say if Fitch and Moody's raise them then it'll trigger sell-offs from institutional investors.
I think it's still too early to tell. S&P downgraded after the markets closed on Friday.
The real test should be this evening when the Asia session opens and into the morning.
Let's see how it plays out.
>Thing is though, the institutional investors who have policies of holding x% AAA debt can always change those rules. Because there's only so much AAA debt out there -- that's why it would be kinda bad for everybody if the US Gov't didn't carry ANY public debt.
The institutions themselves can't just change the rules. They have to work with regulators - who then can change the rules and allow them to change their portfolio allocation. It's not as easy as flipping a switch.
What's for sure though, every single financial regulator in America is working overtime this weekend.
>Suppose you're a fund manager of a huge fund with $40bn under management. A full 1/4 is T-bills. Your mandate is to hold 1/4 of your fund in AAA debts. Well -- where do you put than 10 billion?
That's simple for a hedge fund, or a private equity fund. But pension funds, mutual funds, insurance companies - the real section of the financial industry that accounts for hundreds of billions, if not trillions of AAA assets, have to abide by regulations.
Take social security - legally, social security has to be invested in AAA gov't paper. I am not sure if the Treasury can change this rule easily - I imagine it can have some sway here, but there are other financial institutions that hold significant amounts of AAA gov't debt (central banks for instance) that are legally required to do so - by their respective legal jurisdictions.
The same could be said for just about every other participant in banking, real estate, government financing, etc...including individuals who bought houses at the top of the market. It ignores the ability to learn from mistakes. The point here is that the ratings agencies are going to be much more careful handing out AAA ratings in future, BECAUSE they messed up. It's exactly the collective short-term memory you refer to, in action.
An AAA rating should be conferred on an entity that is riskless. The recent debt debacle is very likely to be repeated in the near future. These are not the actions of a riskless entity.
