World financial fate in hands of Credit Rating Agencies

Credit Rating Agencies, not honest brokers, now hold world’s fate – Peter Goodman, HuffPost

If the agencies downgrade American debt to a notch below AAA, that could trigger panic in the global market. Some pension funds and other pools of money may be forced to sell their Treasury bonds, owing to obligations that they stick to investments that have the full seal of approval from the credit rating agencies. If the pension funds sell, that should push down the value of the dollar, which would force the Treasury to hand out higher rates of interest to find takers for its debt, which would eventually filter through the broader economy as higher interest rates, making it harder for people to finance homes and cars and stay current on their credit card balances.

And if United States debt no longer looks as solid, that is likely to cast a shadow on other debt in the global financial system, likely jacking up the rates that strapped governments in Ireland and Portugal and elsewhere must pay to find takers for their bonds, intensifying the pressure in Europe.

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Huge mortgage lenders like Countrywide and Washington Mutual paid hefty commissions to brokers who wrote loans to anyone not verifiably dead, then took those loans and sold them to the giant investment banks -– Goldman Sachs, Lehman Brothers, Citigroup. The Wall Street bankers packaged these loans into bonds that they then sold off around the globe –- to pension funds in the United States, to governments in Asia, to private investors in Europe.

How did they pull off this feat of alchemy, turning mortgages written willy-nilly, with scant credit checks, into seemingly rock-solid bonds that could be sold to conservative investors, like the managers of public retirement funds? With the eager complicity of the credit rating agencies. The agencies accepted billions of dollars in fees from the Wall Street banks for advice on how to structure their offerings so as to garner the highest ratings -– AAA, the gold standard, the sign that a bond is essentially as reliable as one delivered by Uncle Sam.

It was a game, and a lucrative one at that. The banks amassed great piles of garbage -– loans written to people with no demonstrable way to make their payments -– and the ratings agencies showed them how to build this trash into sculptures shaped like AAA. For this, they were paid handsomely, because their assent was the key to placing these bonds so widely and driving up their price. The public money managers were in many cases restricted to buying assets with AAA ratings, meaning the agencies had the power to shape the size of the market.

And when homeowners actually started falling into delinquency en masse, revealing these supposedly sterling bonds as piles of garbage, the credit ratings agencies kept their fees. They fended off the inevitable flurry of lawsuits from aggrieved buyers of the bogus bonds with free speech arguments: They had just issued their opinions, they asserted, and what a shame that they had turned out to be wrong about pretty much everything. It was only a coincidence that their consistent errancy had enabled the people who paid them for their lousy opinions to become stupendously rich themselves.

The Wall Street traders kept their money, too, and the smart ones made more by buying up distressed bonds that were close to worthless during the worst of the financial crisis, flipping them for profit later on. The only people who actually got hurt by all this were, well, everyone else: taxpayers, homeowners, savers, retirees, working people. And now the American economy is again menaced by a rush to slash spending to close state and federal budget deficits -– a process that will only weaken a stagnant economy, reinforcing the hurt.