This is so absurd it made be burst out laughing in the midst of a sip of coffee this morning–and fittingly the coffee splashed over the idiotic front-page article in The New York Times (yes, I still read the actual paper version) that hails the newest words from the mountaintop, wisdom passed down from the oracle of financial probity…Moody’s. Why is anything Moody’s saying taken seriously? Well, there is an answer–which says more about the continued corruption of our financial system. And it would be comical–if the potential consequences were not so bad.
The earthshaking news:
Moody’s Investors Service warned Thursday that it might downgrade the United States government’s sterling credit rating if Congress did not increase the nation’s debt limit “in coming weeks,” putting a spur to the sputtering talks between party leaders and the White House on a plan to restore fiscal stability.
The warning, from one of the agencies whose assessments of creditworthiness help determine interest rates, amounted to a stern reminder from Wall Street to Washington that global financial markets are watching the budget battle closely and that a standoff or brinkmanship could have economic consequences.
Both sides seized on Moody’s statement to reinforce their bargaining positions, with Republicans demanding that President Obama get more serious about deep spending cuts and Democrats saying that Republicans are risking a financial crisis in pursuit of an ideological agenda.
To be sure, I think the debt limit debate is absurd–and a Republican fiasco. But, there is a different question here:
Why is anyone listening to Moody’s?
I am reminded of that moment in the Star Trek movie "The Final Frontier" (All of life, after all, can be explained either via The Godfather or Star Trek) when "God", all-knowing and apparently benevolent, asks to be transported from the planet’s surface on a starship. To which Captain Kirk, clearing his throat, interrupts and asks, "What does God need with a starship?" That simple question exposes "God" as a fraud and, well, God quickly turns malevolent…but I digress…
Moody’s is a fraud. It is not independent. It is a creature of Wall Street, and, in particular, the bond market.
The dumb article today made me wonder: did the two reporters, Jackie Calmes and Carl Hulse, bother to read the report of the Financial Crisis Inquiry Commission and the role of Moody’s and Standard and Poor’s in fueling the crisis? Ok, that might be too great a load for two New York Times reporters to shoulder–the Commission’s report is a bit long and tedious. Let’s make it easier: read Michael Lewis’ very entertaining, "The Big Short".
Here is just a taste of what Lewis writes (page 99) about Moody’s:
But everyone on Wall Street knew that the people who ran the models were ripe for exploitation. "Guys who can’t get a job on Wall Street get a job at Moody’s," as one Goldman Sachs trader-turned hedge fund manager put it…
Wall Street bond trading desks, staffed by people making seven figures a year, set out to coax from the brain-dead guys making five figures the highest possible ratings for the worst possible loans. They performed the task with Ivy League thoroughness and efficiency. They quickly figured out, for instance, that the people at Moody’s and S&P didn’t actually evaluate the individual home loans, or so much as look at them. All they and their models saw, and evaluated, were the general characteristics of loan pools"
And, describing a meeting with a Moody’s rep at an industry conference in Orlando (page 103) [quick note: triple-A, referred to below, is the highest quality rating possible]:
The S&P people were cagey, but the woman from Moody’s was surprisingly frank. She told the, for instance, that even though she was responsible for evaluating subprime mortgage bonds, she wasn’t allowed by her bosses to simply downgrade the ones she thought deserved to be downgraded. She submitted a list of the bonds she wished to downgrade to her superiors and received back a list of what she was permitted to downgrade.
Here’s what I don’t understand, said Vinny, hand on chin. You have two bonds that seem identical. How is one triple-A and the other not?
I’m not the one who makes those decisions, said the woman from Moody’s, but she was clearly uneasy.
Here’s another thing I don’t understand, said Vinny. How could you rate any portion of a bond made up exclusively of subprime mortgages triple-A?
That’s a very good question.
…They called Eisman from Orlando and said, However corrupt you think this industry is, it’s worse.[bold emphasis added, italics was in the original]
Moody’s is corrupt. It does not serve as an independent analyst–as one would define, in the real world, "independence". Its fees are dependent on its clients–the institutions that come to Moody’s and ask for a rating.
And it is, in my view, virtually uncontested that Moody’s simply did the bidding of the financial industry in passing the trash that we now know brought down the economy. That the New York Times reporters cannot even add a clause or passing reference a la "Moody’s reputation has suffered a beating in the wake of its role in the sub-prime mortgage debacle" (that would be a modest observation) speaks volumes about the incompetence of financial reporting in what passes as the traditional press.
So, to the current point. Moody’s is part of the mentality, the game, the system, the ideology that is running around screaming like Chicken Little that we face a debt or deficit "crisis". Moody’s–and, in particular, the bond market that it serves–does not give a fuck about millions of people who are unemployed.
By fanning the the false notion of a debt crisis–requiring that "adults" make the "tough sacrifices" so that the debt ceiling can be raised–Moody’s is simply advancing the prevailing conventional wisdom.
A conventional wisdom that is dead wrong. To be sure, the financial leaders will listen to Moody’s–but simply because they share an ideology, not because what Moody’s says is either "independent" or makes any economic sense.
In a rationale world, in which we understood that the biggest crisis is jobs, that we need to spend more money to give people jobs, that federal and state budgets depend on people having jobs with real incomes so they can pay taxes (duh), that the current approaching next stage in the Great Depression has little to do with the phony debt and deficit crisis and almost everything to do with JOBS, JOBS, JOBS–in that rationale world, Moody’s would be a joke and its "pronouncement" would be buried in the gossip pages, not trumpeted on Page One.