Friday, August 19, 2011

A Standard and Poors Primer

Some Recent History of the Ratings Game

"Back in the day" when MeanMesa was still a starry eyed youth, that is, still an overly optimistic adolescent who watched the stock market with awe filled eyes, the investment security ratings were a.) significantly more trustworthy as useful, objective research sources and b.) significantly more credible to the casual market participant.  Research companies such as Standard and Poors rated various investment security and outlook, and Americans -- along with quite a few foreigners, too -- took them quite seriously.

An important way to look at this was to consider the credibility of the ratings being generated by such firms as a "business asset."  A history, at least in the shorter term, which supported the premise that investment decisions could very reasonably be valued by "looking at the ratings" was literally money in the bank for a ratings agency.

For President Romney, No Price Is Too High (image source)

If you were a ratings firm such as Standard and Poors, this was the nature of your credibility.  Further, good credibility turned out to be a very valuable commodity because your business success depended on "your track record."  If investors considered your ratings to be more or less dependable, that is, if market events generally tended to turn out the way you predicted, you could "sell" your firm's future ratings to potential investors just like "whores in a lumber camp."

Of course, there was always the possibility that, every once and while, someone in your company could "tilt the scales" just a little as a favor to some start up company or new investment offering to "sweeten the pie" and encourage money which might have, otherwise, considered a certain investment as too risky to "jump on the band wagon."  

Although a few of these peccadilloes were actually deemed acceptable gambles, they remained what could be called "high risk ratings" where the odds of the future not turning out the way you predicted were more likely than usual.  For example, if your ratings company issued 1,000 ratings per year and among those ratings were 4 or 5 of these far less substantiated opinions, the investment world remained willing to "take its lumps" because the majority of your firm's stuff was generally good.

Standard and Poors Sells
a Little of Its Past and Future

For this part of the "ratings history," we must jump aboard our "Way Back" machine for a quick trip to, say, 2005.

As we visit the 2005 version of Standard and Poors we see a maturing enterprise with a fairly respectable track record of sorting out good investments from bad ones and rating the results.  To arbitrarily quantify things just a little, let's say that the 2005 version of Standard and Poors enjoyed a healthy 80% credibility factor with its customers and ratings users.

However, the American economy in 2005 was similar to that unique feeling of euphoria one might experience while trying a very, very bad drug for the first time at a party.  What would have been in more responsible thinking a really risky adventure had, somehow, been transformed into an acceptable gamble.  

Hey, other financial firms or all sorts were raking in the bucks like there was no tomorrow.  How could a respectable outfit such as Standard and Poors plunge more deeply into this "tidal wave of inebriating prosperity?"  The answer showed up immediately.


Quite a few of the "most profitable" yet "skankiest" financial gizmos of the day were flying around in the mortgage securities market.  The "favors" Standard and Poors found itself able to offer had everything to do with "special research and computation schemes" which could place a very, very attractive rating on a few of these gizmos although, in a more sober light, most of them were tragically flawed, that is, horrendously likely to ultimately collapse in value in a big, big way.

A management decision was taken.  If Standard and Poors were to rate these gizmos artificially high, they would become even more saleable.  The more of them which were sold, the more, uh, grateful Standard and Poors' rating clients would be for the help.  The company itself concluded that, although the credibility of its ratings would drop once the true value of these gizmos were revealed, the damage to its reputation would, in fact, be "worth the gratitude."

With Standard and Poors very nice rating stamped on their envelopes, these "skanky" mortgage securities went "flying out the door" to Arabia, China, and,  well, to everywhere -- including more than a few of the richest houses here in the US.

Of course a similar "ratings for gratitude" business model extended to all sorts of places in the heady days just before the Great Republican Economic Collapse of 2008.  For example, AIG received a wonderfully encouraging rating a few seconds before the corporate megalith entered the Wall Street equivalent of an ICU.  The "fee" for that great S&P rating is reported to have been in the $250,000 range.

With its corporate coffers stuffed with all this "sudden profit," Standard and Poors began a frenzied stock sale with the hope of permanently moving the bountiful cash infusion into the "pockets" of its corporate hierarchy.

Now, if MeanMesa could issue its own subpoenas and hold hearings under oath to track down the exact details of this "gratitude," that is, how many "grateful dollars" went to express this "gratitude" and even to whom all this "gratitude" was directed, the remainder of this post would be a front page head line.  However, all we know about the rest of the story is what happened next.

In any event, the DOJ is now, finally, "looking into" what S&P did with the securitized mortgage fraud.

Standard and Poors Sells
the Rest of Its Past and Future

Remarkably, after the mortgage securities ratings scheme, Standard and Poors still had a remnant of its old credibility left.  Again, to quite subjectively quantify how much of the old, equally subjective, 80% remained, let's say that the ratings firm now enjoyed a 35% credibility.

However, a 35% credibility for a ratings firm portends a tragic future indeed, a fact not missed by the CEO's in charge of plotting the firm's future course.  From the CEO's point of view, most of Standard and Poors' credibility had already been monetized, that is, converted into whatever all this gratitude turned out to be worth, really leaving only the possibility of further monetizing whatever credibility might remain.

But, who in the world would want to pony up the dough to monetize the skeletal remains of this shambles of a ratings company?  What possible market for that little dab of Standard and Poors' remaining credibility could be found?  Further, what, exactly, could be done with the already miserably devalued, splintered shard of its reputation?

 Used rating agency for sale, Low Mileage, priced for quick sale! (image source)
Standard and Poors after the 2008 AAA Mortgage Securities Rating

At this point, our posting must expand its horizon just a bit.  Yup, it's time to name names.

Target the Tea Bag Fleet, Lash the Wheel, 
Bring the Engines to Flank Speed and Abandon Ship!

To "expand our horizon," it will be necessary to creep very delicately into the dark catacombs of Standard and Poors' corporate ownership cult, taking careful notes of the names on the tombs as we pass by them.  To understand the present, we'll need to look at the names of Standard and Poors' past and current players, most importantly a man named Harold McGraw III.

Standard and Poors' Corporate Nest

We notice that Standard and Poors is nestled comfortably in the list of "McGraw Hill Corporate Structure and Acquisitions."  We also notice that Mr. McGraw III's inherited interests roam somewhat further afield beyond the simple management of this corporate conglomeration to include a few very lucrative seats on some Boards of Directors and a little right wing politics, no doubt included to "add a little spice" to this hard working oligarch's otherwise droll, winter evenings.

We also notice that Mr. McGraw III lent his assistance to the "transition team" charged with the safe installation of the unelected George W. Bush regime into the unsavory Washington, DC, political wreckage in the wake of the faux election of 2000.  MeanMesa now suggests that Mr. McGraw's efforts have been enlisted again, this time to "soften up" the combat arena in preparation for the 2012 Mitt Romney "installation."

The final denouement of the now wrecked and sinking Standard and Poors will be to serve the Romney precisely to this end.  That last, lingering bit of ratings credibility will be sacrificed not to wound Obama, but rather to permanently undercut to legitimacy of Romney's only electoral competitors, the tea bags.

Standard and Poors last gallant -- and perhaps, also least gallant --  final act of selfless loyalty to its corporate captain will be the reckless and unfounded lowering of the country's credit rating.  Deserving or not, this final sacrifice will rest in the minds of 2012 voters as the cause of the self-immolating gyrations of the stock market and the precipitous collapse of value in world markets.

Of course, true to basic GOPCon values, such further damage to the country and the world means nothing to GOPCon traditionalist Romney if it lubricates his ascent into the Oval Office.  Recent history is proof enough that highly successful and profitable Republican looting can be conducted in times of dire economic disaster almost as fruitfully as in better times.

Meanwhile, however, as Americans see the last flickers of life departing their 401K's and underwater mortgages, their ire will fall on the Bachmann's and Perry's, the latest manifestations of the crop of tea bag miscreants who have wrecked the economy.  Again.  

If all this damage makes you anxious to vote for Mitt Romney, he'll be right there for you in November of 2012.

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