Why The Moody's Warning About US Debt Is Pure Nonsense

[Ringel05]

(This guest post originally appeared at NewDeal2.0)

America’s Triple AAA credit rating could be at risk should its nascent economic revival not develop into a full-blown recovery, Moody’s Investor Service warned yesterday. The credit ratings agency cautioned that if the US were to grow at slower pace than expected, the largest economy in the world’s already-extended finances could be over-stretched, in turn damaging its AAA credit rating.

Sound familiar? The so-called “Big Three” ratings agencies have been making claims like this for years: in Japan, the UK and, now, the United States. It is worth recalling that these are the same organizations which, as recently as 2007, were conferring Triple AAA ratings on subprime mortgage paper. Did that work out well for you?

The real news here is that anybody takes anything these discredited rating agencies say seriously. As my colleague, Randy Wray, has already suggested, the top three ratings agencies — Moody’s, Fitch, and S&P — should all be ignored. In fact, Wray is right to suggest that we should prohibit regulated and protected institutions from using any ratings by this group. Their history of failure makes my beloved Toronto Maple Leafs seem like a veritable hockey dynasty in comparison.

Why The Moody's Warning About US Debt Is Pure Nonsense

The fight club is now in session. Have at it boys and girls!

 

[Trajan]

moodys, fitch, dun and brad et al all now picked this particular time to step up.....they know who their masters are , they got a HUUUUGE pass on that bs investigation into the housing blowup, so you know the deal.

 

[Toro]

You're right. These guys are generally behind the curve. For example, they have been slow to downgrade the PIIGS. They were slow to downgrade the mortgage markets. So, if their track record is any indication, they have been slow to put the US on warning about the debt ceiling. And this is consistent because the ratings agencies are just saying what I am hearing in the investment community.

 

[Leweman]

You'd think a bad credit rating would come from continually hitting a limit on debt yet always surpassing it. That would make sense though and is not how things work in government I suppose.

 

[waltky]

Moody's pays $864 million for credit rating shenanigans...

Moody's pays $864 million to U.S., states over pre-crisis ratings
Jan 13 2017 - Moody's Corp has agreed to pay nearly $864 million to settle with U.S. federal and state authorities over its ratings of risky mortgage securities in the run-up to the 2008 financial crisis, the U.S. Department of Justice said on Friday.

The credit rating agency reached the deal with the Justice Department, 21 states and the District of Columbia, resolving allegations that the firm contributed to the worst financial crisis since the Great Depression, the department said in a statement. "Moody's failed to adhere to its own credit-rating standards and fell short on its pledge of transparency in the run-up to the Great Recession," Principal Deputy Associate Attorney General Bill Baer said in the statement. S&P Global's (SPGI.N) Standard & Poor's entered into a similar accord in 2015 paying out $1.375 billion. Standard and Poor's is the world's largest ratings firm, followed by Moody's.

Moody's said it would pay a $437.5 million penalty to the Justice Department, and the remaining $426.3 million would be split among the states and Washington, D.C. As part of its settlement, Moody's also agreed to measures designed to ensure the integrity of credit ratings going forward, including keeping analytic employees out of commercial-related discussions. The rating agency's chief executive also must certify compliance with the measures for at least five years. Moody's said that it stands behind the integrity of its ratings and noted that the settlement contains no finding of a violation of law or admission of liability.

A screen displays Moody's ticker information as traders work on the floor of the New York Stock Exchange​

Moody's said it already has implemented some of the compliance measures in the agreement. Moody's shares closed at $96.96 on Friday. The stock plummeted more than 5 percent on Oct. 21, the day it disclosed the Justice Department had notified the firm it was planning to sue over the ratings. Moody's settlement on Friday resolved the Justice Department probe without a federal lawsuit. In the Standard & Poor's case, resolution was reached after the U.S. filed a $5 billion fraud suit.

Connecticut, whose attorney general helped lead negotiations, filed a lawsuit against Moody's in 2010. Mississippi and South Carolina later sued, and other states had potential claims. Connecticut's lawsuit claimed that Moody's ratings were influenced by its desire for fees, despite claims of independence and objectivity. It also accused Moody's of knowingly inflating ratings on toxic mortgage securities. Moody's ratings were "directly influenced by the demands of the powerful investment banking clients who issued the securities and paid Moody's to rate them," Connecticut Attorney General George Jepsen said in a statement on Friday.

Moody's pays $864 million to U.S., states over pre-crisis ratings