Standard & Poor’s

Financial Q&A with Joe Magyer of The Motley Fool

With the recent action taken to downgrade our credit rating by Standard & Poor’s (S&P) and the significant decline in stocks over the last few days, I fired over a few questions to Joe Magyer, a financial advisor at The Motley Fool, UGA grad and friend. Hopefully, this will help you make at least some sense of what is going on right now. Also, make sure to check out Joe’s recent post, The 60-Second Guide to Recession-Proof Investing.

Q: What do you make of the downgrading in the United States’ credit rating?

JM: It is an embarrassment for our country, a blow to consumer confidence, and might ultimately cost us dearly later on. I can’t say I’m terribly surprised that Standard & Poor’s chose to downgrade the U.S, though. They drew a line in the sand when they said they’d want to see $4 trillion in cuts and our leaders didn’t deliver. Not that I give much credence to ratings agencies’ opinions to begin with. Collectively, they’re reactionary and fairly lemming-like.

Q: It doesn’t seem like anyone was happy with the deal worked out between the White House and Congress, but it only seemed like a matter of time before a credit agency like S&P took this step given that the long-term issues with the budget were not addressed.

JM: This is the first of several awkward debt dances we’ll be doing in the years ahead. The latest deal doesn’t come close to solving our longer-term issues. Namely, cutting entitlements. The sooner our elected officials can rip the band-aid off the better, but I expect we’ll keep seeing more political gamesmanship and less progress.

Moody’s lowers United Kingdom’s credit rating

UK parliment

Moody’s Investor Service, one of the three major credit rating services, took a move last week that is sure to send some shockwaves across Europe. Moody’s lowered the United Kingdom’s credit rating due to the debt that will continue to weigh on the country:

Moody’s lowered the U.K.’s domestic and foreign-currency bond rating one notch to Aa1 and changed its outlook to stable. It is the first of the three major ratings firms to do so, though both Standard & Poor’s Ratings Services and Fitch Ratings have the U.K. on negative outlooks.

The move by Moody’s is a psychological blow to the United Kingdom, which is fiercely proud of its historical position on the world stage and keenly attuned to signs of its diminishment. It is also a political blow to Prime Minister David Cameron and his chancellor of the exchequer, George Osborne, who has long justified his painful government spending cuts on the grounds that he is maintaining the U.K.’s triple-A rating.
[…]
“We expect the country’s debt will continue to grow in coming years,” said Bart Oosterveld, managing director in charge of Moody’s sovereign ratings group, in an interview. “In our central scenario, we don’t expect the country’s debt burden to stabilize until 2016.”

Cameron had enacted a series of austerity measures, which were met with protests and derision from opponents, aimed at curtailing the United Kingdom’s sizable welfare state. Unfortunately, these measures weren’t enough to keep the country’s credit rating in tact.

US Sues Standard & Poor’s Over Credit Ratings, Forgets It Made The Mess Itself

Oh, what a tangled web we weave. The United States government has sued credit rating agency Standard & Poor’s over the ratings it gave to mortgages just before the financial crisis:

The U.S. government is accusing the debt rating agency Standard & Poor’s of fraud for giving high ratings to risky mortgage bonds that helped bring about the financial crisis.

The government said in a civil complaint filed late Monday that S&P misled investors by stating that its ratings were objective and “uninfluenced by any conflicts of interest.” It said S&P’s desire to make money and gain market share caused S&P to ignore the risks posed by the investments between September 2004 and October 2007.

The charges mark the first enforcement action the government has taken against a major rating agency involving the worst financial crisis since the Great Depression.

According to the government filing in U.S. District Court in Los Angeles, the alleged fraud made it possible to sell the investments to banks. The government charged S&P under a law aimed at making sure banks invest safely.

S&P, a unit of New York-based McGraw-Hill Cos., has denied wrongdoing and said that any lawsuit would be without merit.

It is without merit, but not for the reasons S&P thinks. See, this whole thing is hilarious, because the situation itself was created by the government. That’s right; if it wasn’t for government meddling in the credit rating market, this would never have happened:

Michael Moore: Arrest head of S&P

Michael Moore is at it again.  This time, he thinks President Obama should arrest the head of Standard & Poor’s.  The corpulent commentator said, in a tweet, “Pres Obama, show some guts & arrest the CEO of Standard & Poor’s. These criminals brought down the economy in 2008& now they will do it again.”  I’m a big proponent of free speech, but Moore is making me reconsider my position.

Arrest the head of S&P?  Standard & Poor’s may have screwed the pooch on their ratings prior to 2008, but is it criminal?  Hard to say without investigation into why they gave those ratings to those derivatives.  However, there is no way that downgrading the United States’ credit rating is criminal. After all, I’ve been wondering if it’s not actually incredibly insightful.  We are addicted to debt, as a nation, and taking on more will not help up get away from it.

Of course, the idea that Michael Moore isn’t exactly in favor of freedom is hardly groundbreaking.  His films have all included statist positions, so the idea that he feels the President can arrest someone because they did something he didn’t like is hardly groundbreaking.

Of course, he’d be applauding the downgrade of a Republican was in power.

The truth is that people like Moore do far more damage to this nation than they actually help anything.  He has a right to say what he wants to say, and despite my glib comment earlier to the contrary, I support his right to say it.  It still doesn’t change the fact that he’s wrong.

S&P downgrade and you

As you know, Standards & Poors downgraded the United State credit.  Let’s face it folks, that’s not a good thing.  Despite the rise in the debt ceiling – you know, that was supposed to prevent just that from happening – S&P downgraded the US credit worthiness.  There has been much wailing an gnashing of teeth in the corridors of government over this, and with some pretty good reason.

Since our government is so dependent on debt, a downgrade in the nation’s credit rating can result in higher interest payments, which will mean more tax payer money will go towards paying back money borrowed.  Let’s be honest, while we all want our national debt paid, we don’t want to see more money going towards doing just that.

Luckily, it was just S&P who slashed the rating.  Moody’s and Fitch have both seen no need to do similarly.  However, the move has still angered many throughout the nation.

Folks on both sides of the issue are busy pointing fingers and blaming whatever boogeyman their side currently enjoys.  John Kerry blamed the Tea Party for not agreeing to a bigger deal.  Former White House adviser David Axelrod actually called it a “Tea Party downgrade”.

Cato: The Price of a U.S. Credit Rating Downgrade

This video from the Cato Institute was released just before Standard & Poor’s downgraded the United States’ credit rating. It explains what the ramifications of such an action, including higher interest payments on borrowed money, and they note that the problem is long-term fiscal problems:

Stocks fall dramatically after S&P downgrade

It was no surprise that the markets would react negatively to news of Standard & Poor’s downgrading our credit rating, but the market had one of its 10 worst days in history on Monday after losing 634 points, or 5.5% of its value:

Stocks took a sharp nosedive in another choppy day Monday to finish at session lows as investors fled from risky assets following S&P’s downgrade of U.S.’s credit rating last week in addition to ongoing economic jitters.

The Dow Jones Industrial Average plunged 634.76 points, or 5.55 percent, to finish at 10,809.85, well below the psychologically-significant 11,000 mark. The move marks the blue-chip index’s biggest point and percent drop since Dec. 1, 2008.
[…]
The S&P 500 plummeted 79.92 points, or 6.66 percent, to close at 1,119.46, its lowest close since Sept. 10, 2010.

Nasdaq sank 174.72 points, or 6.90 percent, to end at 2,357.69, its lowest close since October 4, 2010.

August is already on track to be the worst month for the S&P and Nasdaq since Oct. 2008.

Not only were the markets reacting to the S&P downgrade of our credit rating, but also the credit agency’s downgrade of Fannie Mae and Freddie Mac, the government-created housing giants. And President Barack Obama didn’t help matters either. The White House announced that he would speak at 1pm; however, he didn’t speak until approximately 1:50pm. The Wall Street Journal noted after Obama delivered his remarks at 2:04pm:

Progressing Right Along

The following was submitted by Nick Nottleman, a reader and concerned American, on the debt ceiling debate and subsequent downgrade in our credit rating by S&P.

Newt Gingrich recently said that his biggest regret while Speaker of the House was not addressing baseline budgeting.  This is the mechanism that says Federal Government Spending is automatically increased each year based on a given percentage.  For Example, our 2011 Federal Budget is approximately 3.9 TRILLION dollars.  Using the baseline of 8 percent, our spending should automatically increase 312 BILLION in 2012.

It is also the mechanism that projects these increases in spending and thus a projected budget for the next 10 years.   And the really neat part is that if you decide to spend a little bit less than what these projections indicate, you get to call it a “cut”.

Now here’s the kicker…  Anything you add to the annual spending, call it something crazy like “Stimulus”, “Omnibus”, or heck, even “Socialized Medicine”, well, that stuff sneaks right in there and receives it’s nasty little automatic increase.

ICYMI: S&P downgrades our credit rating

As you’ve no doubt heard, on Friday, Standard & Poors (S&P) downgraded the United States’ AAA credit rating because the debt deal reached by the White House and Congress failed to cut the $4 trillion deemed necessary by the credit rating agency during the debate the debt ceiling:

S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy outlook for America’s finances. It downgraded long-term U.S. debt to AA+, a score that ranks below more than a dozen governments’, including Liechtenstein’s, and on par with Belgium’s and New Zealand’s. S&P also put the new grade on “negative outlook,” meaning the U.S. has little chance of regaining the top rating in the near term.

The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled. Around 1:30 p.m., S&P officials notified the Treasury Department that they planned to downgrade U.S. debt and presented the government with their findings. Treasury officials noticed a $2 trillion error in S&P’s math that delayed an announcement for several hours. S&P officials decided to move ahead, and after 8 p.m. they made their downgrade official.

A sign of things to come…

Not long after warning the United States that it needs to get its fiscal house in order, Standard & Poor’s has downgraded Greece’s credit rating:

Standard & Poor’s Ratings Services downgraded Greece’s credit rating Monday, dealing another blow to the debt-laden European nation.

S&P lowered its long- and short-term ratings on Greece to B and C, respectively, from BB- and B previously. The ratings remain on credit watch with negative implications.
[…]
S&P’s downgrade “reflects our view of increasing sentiment among Greece’s key euro-zone official creditors to extend the debt payment maturities of their €80 billion of bilateral loans pooled by the European Commission,” the rating agency said in a statement.

As part of this, S&P believes the euro-zone creditor governments would likely seek “comparability of treatment” from commercial creditors in the form of their similarly extending bond and loan maturities.

Bankrupting America created this video last year at the height of the protests in Athens as the government made changes to public benefits after it was plunged into a crisis over the nation’s debt:


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