Thanks a bunch, S&P
A lesson on how not to rate debt
For anyone who’s been wondering what touched off the latest round of market silliness, Preet Banerjee at wheredoesallmymoneygo.com has an interesting take on the timeline of events.
Assuming he’s right, markets started misbehaving Thursday, August 4, due to fears over the Eurozone’s debt situation. The only problem with that is such fears were not new and seemed an unlikely reason for a sudden sell-off.
Friday was more of the same, but accompanied by new theories (most of them lame). Then, after the markets closed, S&P announced its downgrade of U.S. debt from AAA to AA+. Then it gets interesting.
S&P sent a draft report to the Obama administration prior to release which contained a $2 trillion (yes, with a T) error related to the estimate for discretionary spending. S&P corrected the error but stood by its rating.
Wrote Bannerjee, “Shortly after the downgrade, people started to put two and two together and realized the Thurs/Fri sell-off was because the downgrade had leaked. It’s possible a few people knew, made moves big enough to scare those who didn’t into selling as well. Downgrade announcement made Friday evening, lightbulbs go off everywhere (the ones above people’s heads).”
So in a nutshell: a rating agency makes a mistake, doesn’t own up to it, announces the first downgrade of U.S. debt in history, allows said downgrade to leak two days prior to announcement and inadvertently touches off the worst market volatility since the Global Financial Crisis.
Naturally, questions are being raised about S&P’s analysts. For a revealing (and darkly comical) walkthrough, check out this piece by the dean of the Rotman School of Management, Roger Martin.
It would be even funnier if we hadn’t all just lost billions of dollars.