It is past time that we stop caring about what Moody’s Investment Services and the other credit rating agencies have to say about Maine.
Last week, Moody’s put Maine’s credit on a negative watch, which means sometime in the future it might decide to downgrade the state’s credit rating, maybe.
Every major media outlet in the state covered the news, and politicians on both sides of the aisle attempted to take advantage of what Moody’s had to say.
The report, which is little more than a press release filled with jargon, on balance had more good things to say about Maine than bad. And those good things have been true for many years, under Democrats, Republicans and independents.
Our state pays back bonds — which we use for such things as roads and bridges, to support innovation and to conserve land and protect our water — quickly and maintains a low debt ratio.
The bad has also been consistent: Maine doesn’t have enough money in its reserve accounts, job growth is sluggish, our population is getting older and we have a structural budget gap because we haven’t found the right balance between taxation and spending.
In the real world — the one where families get up every day, go to work, pay their bills, take care of the kids or their parents — the tsk-tsking of a bunch of Wall Street hoodlums doesn’t matter one iota.
And here’s the thing: It shouldn’t matter.
For a little history, Moody’s is one of the big three credit rating agencies that make money by passing judgment on folks who want to sell bonds. Whether it’s private industry or the government, the rating agencies are supposedly the arbiters of risk.
If they give a borrower a good grade, it’s supposed to help investors know that the bonds being sold are a safe investment. That there is little risk of default.
The rating agencies make their money — and they make plenty of it — by charging would-be borrowers for the evaluation. Maine had to pay to receive last week’s dose of bad news.
In most circumstances, if a government or company wants to sell bonds, they have to have the rating, or investors could be scared off.
It is the scam of all scams, especially for a state like Maine or for U.S. Treasury bonds.
There is almost no chance that Maine will ever default on a general obligation bond. If state revenues absolutely collapsed, the first people getting paid are bondholders, even at the expense of the old, the sick and children.
Government bonds are as safe an investment as there is, which is why U.S. Treasury bonds pay so little to the people who buy them and why it’s such smart public policy for Maine to use bonding for needed investments.
In 2008, the entire world fell into an economic abyss, from which we are still struggling to recover.
That collapse was fueled by amoral risk-taking on Wall Street and aided and abetted by the rating agencies. In 2009, Congress created the Financial Crisis Inquiry Commission to figure out what caused the economic crisis.
Here’s what the report said about the rating agencies: “The failures of the credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied upon them, often blindly. In some cases, they were obligated to use them.”
Every story that mentions Moody’s or the other rating agencies should include that paragraph, just as a reminder.
Maine’s Constitution ensures that the state’s debt gets paid.
I trust that a lot more than I trust Moody’s or Standard & Poor’s, which have shown themselves to be poor arbiters of good governance and risk management.
They are a relic of an outdated and dangerous financial system that puts its own interests far ahead of the people who live and work in Maine and even the investors who they are supposed to protect.
They don’t advocate for policies that will create jobs, improve education for our kids or hold down the costs of health care. They don’t consider clean air or clean water. And they aren’t interested in helping the middle class or even growing the economy.
They’re just in it to get paid, regardless of the consequences for working families, the economy or investors.
It’s time we recognize them for what they are and treat their ratings accordingly.
David Farmer is a political and media consultant. He was formerly deputy chief of staff and communications director for Gov. John E. Baldacci and a longtime journalist. You can reach him at dfarmer14@hotmail.com.
Another wise article that pinpoints a critical aspect of why our economy collapsed in 2008: the failure of the big rating agencies like Moody’s and Standard & Poor’s. This failure is not some liberal fairytale but rather the finding of the Financial Crisis Inquiry Commission, created by Congress.
Please, people of the United States, wake up and realize that Wall Street is very corrupt and broken. It needs regulation and reform. Stop blaming the poor, who are the product, not the cause, of our financial disintegration.
Well, you don’t have to like them, but they the interest rate on any bond depends upon the rating and how much investors want to invest in Maine. To ignore Wall Street when you need them to raise cash is folly.
If Maine government would live within our means we could tell the rating agencies to go pound sand.
Well I suppose, but no large organization can operate effectively without a line of credit, and I’d prefer that line be affordable.
Try all you like – you can’t rewrite history. The 2008 collapse was the result of federal policies to expand “affordable housing.” Both D’s and R’s are to blame.
The same Congress you credit for creating the FCIC also recognizes Moody’s and Standard & Poors as two of the exclusive agencies authorized to rate US debt.
The common thread here is TOO MUCH government involvement. Not too little. You can’t douse a fire with gasoline.
Blaming the government for the 2008 crisis, because it advanced policies to make housing affordable, is totally insane. The problem was (and still is) the greed of the banking industry. For example, on May 10 of this month, the unregulated investment bank JP Morgan lost 2 billion dollars. Here’s what Business Week said about it:
———
The $2 billion trading loss that JPMorgan Chase
announced in a hastily scheduled conference call on May 10 has its
roots in credit-default swaps, the same derivatives that helped trigger
the financial crisis—only this time there were no mortgages involved.
http://www.businessweek.com/articles/2012-05-17/how-jpmorgan-lost-2-billion-without-really-trying
——–
Back in 2008, the big banks were bundling mortgages and selling those bundles (derivatives) to investors. The derivatives were junk, but Moody’s and others kept rating them AAA. Investors lost big time. Some of the big banks bet against their own investors, they knew the bundles mortgages were junk, despite the AAA rating:
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
Please, people of America, the big Wall Street banks are greedy and corrupt. They are making a few rich people even richer and the rest of us keep paying to have them bailed out. We are effectively subsidizing these banks. Over a trillion dollars has gone from the taxpayers to these Wall Street banks, a kind of backdoor socialism for “too big to fail” financial institutions.
I truly urge you not to listen to the Republican lie that the government is to blame, and that the banks are blameless. Do you really believe the big Wall Street banks didn’t play the system in a greedy way? See the Oscar-winning documentary Inside Job. Or just talk to anyone who works on Wall Street.
Wake up, People of America, corruption at the top owns this country. Don’t let Republicans tell you that poor people are to blame. They are the result, not the cause, of our sickness at the top.
It was a TRADING loss that was the problem not a VALUE loss in the underlying equity like 2008.
Someone made a $2 billion profit to JPM’ loss. It happens in every trade. They made a mistake someone noted it and made a profit. That is something that would not have changed regulated or not.
You’re dead wrong, as usual (“it happens in every trade”??). Even Fox News sees the magnitude of the problem and the MAJOR fallout.
————
Three high-ranking people are expected to leave J.P.
Morgan Chase & Co. this week, said people familiar with the situation, in
the latest fallout from a trading blunder that has cost the bank at least $2
billion.
http://www.foxnews.com/us/2012/05/13/three-executives-to-reportedly-exit-jp-morgan-after-2-billion-loss/
Of course there is fallout… Make a big mistake at JPM you are gone. Make a big mistake at my firm and you are walking the same pavement.
You even said it yourself…”The $2 billion trading loss that JPMorgan Chase…”.
Trading means someone bought it… that’s what a TRADE is!!!!
Only in government does a gigantic mistake have no consequences. See Maine’s failed Mainecare computer billing system for an example close to home.
Again, you are missing the point. This is more than a loss, it is indicative of moral wrongdoing. If you had read the Business Week link I provided above, you would have seen that the Justice Department is launching a criminal investigation.
Try to say something relevant, instead of just spouting airy conceptual distinctions.
—-
The bank has launched an internal investigation, regulators are
swarming, and the Department of Justice has said it is pursuing a
criminal probe.
http://www.businessweek.com/articles/2012-05-17/how-jpmorgan-lost-2-billion-without-really-trying
—-
Funny. You even provide a good source on what happened and you still miss it.
Its not the poor who are to blame but rather the idiots who forced the banks to give loans to those poor even though they were never going to be able to repay them. Its called the Community Reinvestment Act. You can keep jumping through hoops trying to blame the GOP for the horrible law passed by those oh-so-compassionate democrats, but anyone with the ability to read on a 6th grade level can find out the truth. Google the CRA and see what you find. In the meantime ignore these moonbats who try to claim its all the banks fault. It simply doesnt make sense to think the banks awarded mortages to those with less than median incomes and/or poor credit. They dont do that. They only give loans to those with the means to repay them. That is unless you pass a law like the CRA and force them to.
Oh please, it was a lack of oversight that was what caused the collapse. You really want to argue that government needs to get out of the way so we can have more quicker erroneous and “robo-signed” foreclosures? Let those too big to fail guys get even bigger? Get real man.
“It is past time that we stop caring about what Moody’s Investment Services and the other credit rating agencies have to say about Maine.” I absolutely agree, unless it affects the rate at which the state can borrow. Oh, and wasn’t your leadership saying we *had* to pass the bonds this year *because* of Moody’s?
Of course it affects the rates, so whether we think they have credibility or not (I agree, they’ve lost it), the ratings have a huge impact on our cost of borrowing.
While that is true by definition, the rating no longer have value in discerning the level of risk inherent in an issue of debt. They are corrupted, fatally. Ratings agencies need to be re-regulated so that borrowers pay the fees. This simple change removes the conflicts of interest that have resulted in unprecedented economic damage the world over.
You are absolutely right. But the corrupt ratings still affect our ability to borrow. When NBA refs wouldn’t charge Michael Jordan for travelling, the other team could laugh at them but they couldn’t ignore them.
Farmer’s criticism of rating agencies seems contrived. Perhaps because he realizes Maine’s recently lowered rating can be placed at the feet of Democrats.
bs– the rating agencies have no credibility, NONE
Try to get a good interest rate for your never ending bonds, without a good credit rating from the “no credibility” rating agencies.
Your argument: We have to let the Rating Agencies do what they want, because they are so powerful
Counterargument: that’s cowardly, unethical, and will result in even more harm to the integrity of our financial system.
If Maine government lived within our means we could tell the rating agencies to go pound sand.
I made no such argument.
Don’t set me up as a character in your fantasy… makes me feel weird.
Funny how LePage and the Republican controlled Congress have lost so many jobs already, about 4000, and somehow you claim the lowered rating is not their fault. LePage has achieved national attention for Maine, about a mural; and about his comments to the NAACP; and his statement about BPA (“little beards”). If I was a rating agency, I’d lower the rating because LePage is volatile, undiplomatic, stubborn and unpredictable.
Credit rating worked well until it was fundamentally changed in the 1970s. Borrowers used to pay the fees. After the law change, issuers pay the fee, creating conflicts of interest. Now if a debt issuer wants to prop up the expected value of its bonds, it pays “consulting” fees to the rating agency in return for a higher rating on the issue. This is what allowed mortgage backed securities to be sold as investment grade when they were plagued with bad loans.
As a result of the agencies indifference to the conflicts of interest, the rating system has been corrupted. Now, the ratings they give are based on the payoff not the inherent risk. As such, they are not reliable for their prime purpose, to help investors differentiate between portfolios of differing risk.
The ratings agencies are one of the primary reasons for the housing collapse and the resulting damage to our economy. Until issues like this rise to the fore and result in changes, investing in markets everywhere lacks the transparency required for healthy financial markets.
AS an investor today, you have to accept the rating as that sets the price but you should no longer assume that a favorable rating indicates a safe investment. The day before the Enron collapse, its high rating was reaffirmed. The consulting fees paid by Enron make clear that the money influenced the rating. This is a clear example of how deregulation destroys economic stability.
Great points. Here is a timeline to accompany what you say:
http://www.motherjones.com/politics/2008/07/where-credit-due-timeline-mortgage-crisis
Sadly all the propaganda is amusing at best. First, the credit rates are real and the blame game is troubling. The banks are Gov’t and the Gov’t are banks, all controlled by the Federal reserve.
2nd- It WAS Gov’t who forced banks to make loans on homes to people who many or may not be able to pay them back. Just look at how it worked. You get a home at 1% interest then in as little as 8 months it’s up to 6-7% No matter if you keep the home or lose the home, the bank made money. For those who lost their homes the banks were reselling em until the bottom dropped out.
3rd- Who came to the aid of the banks? That’s correct, the Gov’t with big bailouts. Now JPM cries about $2B in loses, but made $8B in profit instead of $10B. Boo Hoo.
Now lets get to the problem. All 50 states along with our Gov’t is so deep in debt they only pay the interest on trillions and trillions of debt. ($15.7T in DC alone) Now as you borrow more and spend more, as with citizens, if lenders feel you are at risk of default your interest on the loan goes up. Moody has simply warned Maine that we have gone to far in spending. Why? Those living on entitlement programs are not paying in taxes that in which they use. Meaning the state must tax others more in paying for it. One sad thing those getting the handouts forget others are being forced into bankruptcy for it. One good look at Greece and the “socialist living seen in the EU is what WILL happen here if DC does not get out of our lives and make people accountable for their own lives, not dependent on Gov’t programs nobody can afford. Think of all the help the true poor could get with money that now goes to the entitlement minded of unions and those who WANT the same. Cut the foolishness and get back to the constitutional republic that built the country in the first place.