This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Kass: Change Is What We Need

The rating agencies -- Moody's Investors Service, Standard & Poor's and Fitch Ratings -- all originally served bond investors, who paid for their research. But that model changed in the 1990s to one that was funded by the syndicators and underwriter of structured financial products such as mortgage-backed securities. Essentially, bankers "purchased" the rating they desired. As a result, the performance of the ratings agencies decayed, as they were no longer judged on the quality of their analytical reviews. Second, the underwriting quality of syndicators fell, as they (not a neutral third party) were, in effect, picking their own credit ratings. The real question for the financial markets is why we even require ratings agencies to evaluate complex financial products anymore.

-- Barry Ritholtz, The Big Picture
Let me start on a critical note regarding S&P's rating credibility. Historically, the agency has tended to be backward-looking, and its questionable ratings played an important role in the last credit crisis.

I tend to side with Warren Buffett's comments -- remember this is the same agency that downgraded Berkshire Hathaway's (BRK.A - Get Report)/ (BRK.B - Get Report) debt and maintained AAA ratings on U.S. mortgage-backed securities and other structured products (to the bitter end).

For years, the ratings agencies have not acted as "arm's length" and independent entities; they have acted as financial pimps to those institutions that distribute fixed income and structured products.

S&P's credibility was further strained on Friday by a $2 trillion mathematical error in the deficit calculation, leading the Obama Administration to challenge the S&P's decision.

Morgan Stanley's David Greenlaw pointedly summarizes the criticism that will likely be levied on S&P:

I have a very hard time seeing how the S&P action will have a significant impact on markets. The only thing that has changed in the U.S. is that a bunch of Keystone Kops at S&P have issued a ratings change using bad data, questionable assumptions and political spin. To be sure, the U.S. has plenty of long-term fiscal problems that need to be addressed, but the justification for a ratings change (using the criteria that S&P itself outlined in prior reports) is severely lacking. While I suspect that markets will come to the same conclusion as I do regarding S&P's credibility, the major issue for me, is whether word of the downgrade further damages confidence on Main Street. Here are my specific concerns.
  1. The political spin is obvious in S&P's public position. According to The Wall Street Journal: S&P's conclusion "was pretty much motivated by all of the debate about raising of the debt ceiling," John Chambers, chairman of S&P' sovereign ratings committee, said in an interview, "It involved a level of brinksmanship greater than what we had expected earlier in the year." Admittedly, the process got very ugly -- but no one in a leadership position in Congress or the Administration was advocating default at any point along the way.
  2. The Treasury Department has issued an official explanation of S&P's error involving the wrong baseline. See "Just the Facts: S&P's $2 Trillion Mistake" available here.
  3. Perhaps the most outrageous aspect of the downgrade in my opinion involves the change in assumption regarding the Bush-era tax cuts. This is a massive adjustment (worth nearly $4 trillion over the next 10 years) that appeared to be slipped in at the last second to make up for the baseline error discovered by the Treasury Department.
2 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BRK.A $190,820.00 0.00%
BRK.B $126.56 0.00%
AAPL $94.02 0.00%
FB $104.07 0.00%
GOOG $683.57 0.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs