Saturday, August 13, 2011

Standard & Poor’s: Welcome to Our World!

SEC Examines S&P’s Math
Italian Town’s Prosecutors Probe S&P, Moody’s
White House Challenges S&P Decision
—The Wall Street Journal
 “The fact is, we didn’t need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction.”
 So said President Obama the other day.
 Unfortunately, on that matter, the President is dead wrong: the fact is, we did need a rating agency to remind us that 40% of what our Federal Government spends is borrowed; that this is unsustainable; and we better do something about it before it’s too late.
 Otherwise, nobody in Washington would have paid attention to that fact until it was too late.
 But our point here is not about our Japan-style budget policies, or the 11th-hour budget deal, or dis-function in DC or even the S&P downgrade itself.
 It is about the fact that Standard & Poor’s is now being attacked—by Congresspersons who wouldn’t know a balance sheet from a tomato; by White House staffers whose paychecks and generous healthcare benefits are paid by the taxpayers S&P is looking after; and even by prosecutors in the Italian village of Trani, which, as Stacy Meichtry and Nathania Zevi of the Wall Street Journal noted, “hasn’t played much of a role in the global economy since the Crusades”—for merely evaluating what it is paid to evaluate and saying in plain English what it has concluded.
 Granted, S&P didn’t cover itself in glory during the downgrade, switching its math at the last minute and rewriting its premise to accommodate the use of a different, less-than-worst-case scenario, and thus opening itself up to political hacks eager to shoot the messenger.
 But the message is right: after all, America has, as PIMCO’s Bill Gross points out, $66 trillion worth of entitlement liabilities—and that’s present value—amounting to half a million dollars per household.
 Still, that fact won’t stop those who benefit from our lousy, unbalanced budget from screaming the loudest at the downgrade, and using every lever at their disposal—Congressional hearings; lawsuits; bought-and-paid-for “60 Minutes” so-called ‘investigative’ stories—to discredit and disable the folks at Standard & Poor’s.
 After all, this is what CEOs do when intellectually honest analysts, short-sellers and just plain folks criticize, publicly, their companies for flaky accounting, serial restructuring charges and worse.
 Which is why so few people bother any more.
 So welcome to our world, Standard & Poor’s, and keep speaking your mind.
 It may be the thing that saves us from ourselves.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at

© 2011 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.


Anonymous said...

Jeff -- this entry should be printed as a guest editorial in the New York Times and/or Wall Street Journal.

Keep up the good work.

Matthew said...

I'm pretty sure you're entire thesis is wrong (that it required a downgrade to get people focused on this issue). People were already focused on the short-term issue, and people are still not focused on dealing with overall health care spending, which is really all the long-term issue amounts to.

And you are wrong about S&P, You've probably seen this:

but if you haven't, you should.

Matthew said...

I didn't care a whit about how S&P rated the US prior to this month, and I don't care now, but I don't think that this is one of your more accurate posts, and that you are giving them completely undeserved credit.

I think your thesis is wrong, in that people were focused on the short-to-medium deficit problem before the downgrade. I think it is wrong in that people are still not focused on the long-term problem of overall US healthcare costs, which is the essence of the long-term problem.

And I agree with this post (which I expect you may have seen)

that S&Ps opinions, political or otherwise, should be taken with a shaker of salt.

Anonymous said...

Not that I disagree with your assessment, but seriously to hold up the crooks at S & P as the voice of reason is ridiculous. There had to be other people, people with some integrity, that you could have quoted about the budget mess and government dysfunction.

Anonymous said...

Personally, I don't think it's right to complain about the tussle between the White House and Congress. The Constitution was intentionally drafted with several checks and balances, to prevent any arm of government being too powerful. Even President Jefferson had to fight a hostile Congress! So, if that's good enough for one of the founding fathers, then it should be good enough for President Obama.

The real problem with the current situation is not the political fights (which are only to be expected). The real problem is that Uncle Sam borrows too much to fund spending during recessions, but never quite gets around to repaying the debt during the good times. So the debts mount up over time and those a$$holes in Treasury try to deal the problem by inflating their way out of it.

So if you think that the present system is broken, well, the problem is not Congress or the White House; the problem is US Treasury Department (and to a lesser extent the Fed - don't get me started on those clowns!). The only solution I can see here is to fire all of them and start again.

Disclosure: I am not involved with the Tea Party, but I do have sympathy for some of their points.

Jeff Matthews said...

Matthew disagrees that it took a threatened ratings downgrade (which happened anyway) to get people focused on the debt problem.

I'll disagree with that: the debt ceiling was a short-term, mechanical issue related to the debt itself; the threat of a downgrade drew attention to the magnitude of the long-term problem. As for S&P having its share of idiots--well, we sort of knew that, thanks to what happened to the kind of structured, "AAA" products that blog-writer worked on, right? I would suspect however that S&P has far fewer idiots than our Congress.

At the end of the day, the issue is, is the US a Triple-A credit? Not with $66 trillion NPV unfunded entitlements.

And Anonymous #3 (who uses a bit of message-board style language that slipped through our screening: never use that stuff here again, your comment will not be published no matter whether you agree or disagree with us) says for some strange reason that the fault rests with the Treasury Department rather than Congress and the White House.

That logic is hard to fathom: it's like blaming the match for starting the fire.