Wall Street’s Enforcers: Standard and Poor’s Imposes Shock Doctrine 2.0
It was bad enough that Standard and Poors screwed the world economy by recklessly giving AAA ratings to worthless mortgage backed securities without ever reviewing the underlying pool of loans. But now they’ve decided to play the role of “enforcer” in Wall Street’s latest gambit: forcing the sale of US assets in an austerity fire sale.
The downgrade of state bond ratings has already forced states to sell off their parks, zoos, airports and parking meters in order to meet their budgets. It increases their cost for borrowing money. And if they try to fund their pension funds, well that causes their credit ratings to be downgraded too. The $4 trillion austerity package that Standard and Poors is demanding out of Washington DC will only make matters worse.
Fortunately Wall Street, having determined that they need another business besides owning zombie banks, is sitting there with a huge cash position just waiting for prices to drop. They’ve decided owning the crumbling US infrastructure is a good idea. No doubt they’ll soon be back for the money to refurbish it.
The entire deficit ceiling brouhaha is most certainly a manufactured crisis, but it’s a crisis with a purpose. And Standard and Poors is playing a critical role as the enforcer for the fire sale that Wall Street wants.
The International Organization of Securities Commissions (IOSCO) has a code of conduct that governs ratings agencies (CRAs). Section 1.14 states:
The CRA and its employees should not, either implicitly or explicitly, give any assurance or guarantee of a particular rating prior to a rating assessment. This does not preclude a CRA from developing prospective assessments used in structured finance and similar transactions.
The ratings agencies are supposed to be reactive, not proactive. Their job is to be neutral observers who assess risk based on the reality they are presented with.
Although compliance with the IOSCO code is voluntary, the credit ratings agencies are encouraged to incorporate it. And indeed, Standard and Poors includes Section 1.14 almost word-for-word in its own code of conduct:
Ratings Services and its Analysts shall not, either implicitly or explicitly, give any assurance or guarantee of a particular rating prior to the determination of the rating by the applicable rating committee. This does not preclude Ratings Services from developing prospective assessments used in structured finance and similar transactions
But this is what Standard and Poors said when they placed the US AAA ratings on negative credit watch:
If Congress and the Administration reach an agreement of about $4 trillion, and if we to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the ‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.
Someone will have to explain to me how that does not constitute giving an “assurance or guarantee of a particular rating prior to the determination of the rating by the applicable rating committee.”
Having issued a negative outlook, Standard and Poors customarily resolves a credit watch report within 90 days. It is highly unlikely that Congress will pass the austerity package that has the $4 trillion price tag that Standard and Poors is demanding. As such, it leaves them almost no choice but to downgrade US debt.
Dave Dayen notes how utterly irrational this is:
But this is absolutely crazy. The market was up 2% last week. 10-year Treasuries are at 2.96%. There’s no difference between this week and last week in terms of the country’s deficit problem. This is about perception, and it doesn’t seem to even be about the perception of the actual market. It’s about the perception of someone at Standard and Poor’s. The rating agencies, which played a major role in the financial meltdown, has just up and put a gun to the head of the country and demanded austerity in the middle of a jobs crisis. Are you kidding me?
In slapping a price tag on their US debt rating of $4 trillion, Standard and Poor’s flagrantly violates both their own and the IOSCO’s code of conduct. They not only force states into a fire sale of public assets, they also force cuts to programs like Medicare and Social Security that Wall Street has been longing for.
A credit rating agency has no business doing this. Yet here is the ever-helpful Darryl Issa to back them up: “Until we stop spending more, we should be downgraded.”
So say goodbye to your zoos, your parking meters, your bridges and your schools. Your airports, your harbors and your highways. The American public has an enormous investment in these things. But just as certainly as James Duke’s tobacco trust forced farmers to sell tobacco for less than it cost to grow, just as Russia was forced to sell its airports to the oligarchs and Poland was forced to sell its factories, so our municipalities and states and the federal government itself will be “forced” by a manufactured crisis to sell our assets off to private equity firms who are licking their chops at the prospect of owning America outright.
If you’re not outraged you should be. What Debbie did to Dallas, Standard and Poors is doing to you.
Welcome to Shock Doctrine 2.0.