U.S. bond rating will never change says Geithner
The "AAA" rating of U.S. bonds will never change, asserts Tim Geithner, Treasury Secretary of the U.S. I feel better already.
His remarks followed comments by one of the bond rating agencies, Moody's, that claimed the U.S. could lose the highest rating unless it gets its fiscal house in order. Moody's comments got a fair amount of press. Geithner was pressed on the matter on one of those Sunday morning shows that feature this sort of chatter.
Let's look at this for a minute.
First of all, Geithner also said that the government's measures to bail out the economy have been very, very effective. Not effective, mind you; not even very effective; very, very effective. I guess he thinks that saying "very, very" will make it a fact. So I'm sure with that statement of obvious "fact" you're more reassured about his assessment of the future of treasury bond ratings.
What about Moody's? They're the ones talking about the possiblity of lowering the rating on U.S. Treasuries. But, when you think about, Moody's is another one whose words we need to take with a grain of salt. Let's remember that Moody's was one of the ratings agencies responsible for rating the toxic assets that now plague our financial system. These agencies called a lot of things "AAA" that turned into junk in what seemed like a heartbeat. Not only did they screw up the ratings on toxic assets like CDO's, but there's an inherent conflict in their business model.
If you're in the financial services business, you'd know about this conflict of interest (although many chose to look the other way). But to the average American who has better things to do than spend time analyzing Wall Street products, the conflict was a surprise. What came out was the fact that the companies that ask Moody's to rate their products pay Moody's for the rating. Read that again. Then you'll maybe understand how so many CDO's were given high ratings. The companies that created them - who needed a high rating to sell the CDO's for a good price - paid Moody's for the rating. For some reason, in spite of it being something everyone (at least everyone in the financial services business) knew, no one (with some exceptions) ever said "boo" about it - for decades. Of course, when the you-know-what hit the fan in 2007-2008, the truth was "revealed" - at least for a time.
In fact, Moody's was so shaken by the truth about the revelation of how they did business, and by the poor job they did rating those toxic assets, that for a while it looked like they might go out of business. But the storm passed - at least it calmed down sufficiently so that not only is Moody's still in business, but they've, of course, not changed their business model. It's business as usual.
So there you have the two contending parties on this issue of whether U.S. Treasury bonds will retain their "AAA" rating. Geithner simply says "no way." And not just "no way," but "never." Moody's, with their sterling track record of rating things and inherent conflict of interest, taking the opposite side.
In fairness to Geithner, he did try to explain why U.S. Treasury bonds would never be downgraded. He pointed to the fact that in the last crisis, as in many crises in the past, people flocked to U.S. Treasuries. He did try to explain why that's the case. The Wall Street Journal quotes him as saying, "That is a very, very important sign of basic confidence in our capacity as a country to work together to fix these problems."
Can you figure out what he means by that? Well, one thing I noticed is that he's using "very, very" again. I guess he thinks two "very's" are better than one. I wonder where he learned his logic. But nevermind. Rather let's point out that, as they say in all those prospectuses and brochures Wall Street churns out, past performance is no guarantee of future results. Or we could even point out that maybe, just maybe, people flocked to U.S. Treasuries in the past was because they felt there were no better alternatives. Is Geithner saying there will never be any better alternatives in the future. Never?
So that leaves us with the original question: Will the rating of U.S. bond ratings, specifically Treasury bond ratings, face a downgrade at some time in the future?
Whether you believe Geithner or Moody's isn't really the issue. It's still a fair question. What do you think? Oh, and if you do come up with an answer, try to have better reasons than Geithner or Moody's, OK? But don't worry; that shouldn't be so hard to do.
His remarks followed comments by one of the bond rating agencies, Moody's, that claimed the U.S. could lose the highest rating unless it gets its fiscal house in order. Moody's comments got a fair amount of press. Geithner was pressed on the matter on one of those Sunday morning shows that feature this sort of chatter.
Let's look at this for a minute.
First of all, Geithner also said that the government's measures to bail out the economy have been very, very effective. Not effective, mind you; not even very effective; very, very effective. I guess he thinks that saying "very, very" will make it a fact. So I'm sure with that statement of obvious "fact" you're more reassured about his assessment of the future of treasury bond ratings.
What about Moody's? They're the ones talking about the possiblity of lowering the rating on U.S. Treasuries. But, when you think about, Moody's is another one whose words we need to take with a grain of salt. Let's remember that Moody's was one of the ratings agencies responsible for rating the toxic assets that now plague our financial system. These agencies called a lot of things "AAA" that turned into junk in what seemed like a heartbeat. Not only did they screw up the ratings on toxic assets like CDO's, but there's an inherent conflict in their business model.
If you're in the financial services business, you'd know about this conflict of interest (although many chose to look the other way). But to the average American who has better things to do than spend time analyzing Wall Street products, the conflict was a surprise. What came out was the fact that the companies that ask Moody's to rate their products pay Moody's for the rating. Read that again. Then you'll maybe understand how so many CDO's were given high ratings. The companies that created them - who needed a high rating to sell the CDO's for a good price - paid Moody's for the rating. For some reason, in spite of it being something everyone (at least everyone in the financial services business) knew, no one (with some exceptions) ever said "boo" about it - for decades. Of course, when the you-know-what hit the fan in 2007-2008, the truth was "revealed" - at least for a time.
In fact, Moody's was so shaken by the truth about the revelation of how they did business, and by the poor job they did rating those toxic assets, that for a while it looked like they might go out of business. But the storm passed - at least it calmed down sufficiently so that not only is Moody's still in business, but they've, of course, not changed their business model. It's business as usual.
So there you have the two contending parties on this issue of whether U.S. Treasury bonds will retain their "AAA" rating. Geithner simply says "no way." And not just "no way," but "never." Moody's, with their sterling track record of rating things and inherent conflict of interest, taking the opposite side.
In fairness to Geithner, he did try to explain why U.S. Treasury bonds would never be downgraded. He pointed to the fact that in the last crisis, as in many crises in the past, people flocked to U.S. Treasuries. He did try to explain why that's the case. The Wall Street Journal quotes him as saying, "That is a very, very important sign of basic confidence in our capacity as a country to work together to fix these problems."
Can you figure out what he means by that? Well, one thing I noticed is that he's using "very, very" again. I guess he thinks two "very's" are better than one. I wonder where he learned his logic. But nevermind. Rather let's point out that, as they say in all those prospectuses and brochures Wall Street churns out, past performance is no guarantee of future results. Or we could even point out that maybe, just maybe, people flocked to U.S. Treasuries in the past was because they felt there were no better alternatives. Is Geithner saying there will never be any better alternatives in the future. Never?
So that leaves us with the original question: Will the rating of U.S. bond ratings, specifically Treasury bond ratings, face a downgrade at some time in the future?
Whether you believe Geithner or Moody's isn't really the issue. It's still a fair question. What do you think? Oh, and if you do come up with an answer, try to have better reasons than Geithner or Moody's, OK? But don't worry; that shouldn't be so hard to do.
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