It's not that the S&P doesn't have a point, but let's step back and think about S&P's role in the current economic crisis. Their upgrades and downgrades do continue to carry weight and can cause debt financing to increase (as we've seen in Europe and some US states) but the S&P and other rating agencies should have been downgraded out of business long ago. CNBC:
Many investors found the statement ironic, because they believe S&P’s triple-A credit ratings on mortgage-backed securities were a key factor in allowing the investment banks to propel the housing bubble into the stratosphere on the back of bad loans disguised as good credit. It is the housing crash that is the number one reason for the budget shortfalls the country faces today.
“The emperor is naked, but he’s been so for years,” said Patty Edwards of Trutina Financial. “I’m struck by the irony that it is the tailor who sold the emperor the non-existent suit who is now pointing fingers.”
Reports from the Financial Crisis Inquiry Commission and the Senate Permanent Subcommittee on Investigations both asserted that S&P and Moody’s were reluctant to downgrade mortgage securities they knew might sour because of the disruption it would cause with the Wall Street clients that were paying them to rate them, thus setting up the housing house of cards.
“The ‘negative outlook’ of U.S. debt has come about because of the inability of Standard & Poor’s to have performed their jobs rating mortgage backed securities,” said Barry Ritholtz on his Big Picture blog Monday. “Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political [battle] over the debt ceiling.”
