Until recently, no one in the UK dared cross Rupert Murdoch thanks to his influence on the political process.And although Murdoch is going down the same path in the US, of using political power to increase his economic power, the rating agencies seem to have easily trumped him on this one.
Jane Hamsher chronicles the brazen way in which Standard & Poor’s is throwing its weight around in the budget negotiations:
Standard and Poors is evidently meeting with high-stakes gamblers and letting them know where to place their bets as they manipulate the global economy.
But they are also playing a much more sinister game. Like a cat toying with a mouse, they are also inserting themselves in the political process and setting themselves up to be kingmaker in the 2012 election.
An item in Politico’s Morning Money caught my eye:
BEHIND THE MUSIC – S&P’s John Chambers has met with a number of big investors include Pimco’s Mohammed El-Erian. Apparently he is telling them he prefers Reid’s plan.
CNN’s Erin Burnett also tweets that the “source who met with Standard and Poors says SIZE of Boehner plan is the problem.MIGHT not be enough to avert downgrade,needs to be closer to $3TR all at once.”
If these reports are correct, S&P is meeting privately with big investors and giving them information that they are not giving the public about about what their research says, what position they will take, and what they intend to do with regard to a potential credit downgrade of US debt.
This appears to be “selective disclosure” to big investors on the part of Standard and Poor’s. And while putting a $4 trillion number on a deficit reduction package might be in violation of the IOSCO code of conduct, “selective disclosure” is in violation of SEC rules.
f you read the consent order issued by the Massachusetts Securities Division in June of this year (PDF), that’s exactly the activity that got Goldman Sachs in trouble. Goldman was selectively giving information to “large institutional investors” that it did not make available to the public.
Prior to Dodd-Frank, credit ratings agencies were exempted from selective disclosure regulations. Dodd-Frank removed that exemption. S&P is now subject to the same laws that Goldman Sachs is.
But S&P’s activities have the potential to be much, much more sinister than Goldman Sachs’s
An issue that Hamsher noted in an earlier post is that ratings, per the industry’s code of conduct, which S&P has adopted, is that raging agencies are not to tell clients “if you do X, you’ll get Y rating.” The rating agencies allowed themselves plausible deniability in CDO land by making their models available so clients could fit their CDOs to how the agency would look at it. But what is happening here is explicit and unabashed. Back to Hamsher:
It’s not a coincidence that Timothy Geither met with Standard & Poor’s in April to lobby them heavily not to downgrade the US debt.
Nor is it a coincidence that RNC Chairman Rence Priebus was egging S&P on, tweeting that “It is alarming that the WH would encourage S&P to suppress a damaging fiscal report for Obama’s partisan speech.” Or that Darryl Issa is out there saying “we should be downgraded.” Everything in our current environment gets reduced to a battle for partisan political advantage.
S&P is coming in on the side of the Reid plan now, even though that plan appears to be indistinguishable from the Boehner plan in just about every meaningful way. But that plan does not meet the $4 trillion number they prescribed…. its inevitable failure will be used to justify S&P’s decision to downgrade, and it allows them to shrug and say “we weren’t playing politics, we supported the Democratic plan.”
But no matter what political stagecraft is orchestrated, there is a very serious chance that a ratings downgrade will trigger an economic downturn that would cause unemployment to rise dramatically….
I don’t care whether you’re rabidly pro- or anti-Obama, a Republican or a Democrat or an Independent or a Green or none of the above. What S&P and the other CRAs are doing right now is completely illegal and outside the boundaries of their own codes of conduct. They’re acting as Wall Street’s tasers in Shock Doctrine 2.0, and making themselves the key player in determining what happens not only with the 2012 election but with the world’s economic future. They are playing a very dangerous game with the world economy that could have devastating consequences for all of us, regardless of what your partisan identification is.
Hamsher notes in an update that S&P is now piously denying that it is supporting the Reed plan, but there are too many sighings otherwise to make this claim credible.
Hamsher calls S&P a “kingmaker” and this isn’t an exaggeration given the effect their actions are having. Either way, they will shoot the economy in the head. Either the negotiators come up with package that suits their demands, which will lead to steep enough cuts that the economy will weaken in 2012, making an Obama loss highly probable (fresh polls not only show his popularity falling, but independent voters now rate the Republicans as able to do a better job on the economy). And failure to reach a deal soon before Treasury runs into cash flow constraints and/or a downgrade is almost certain to hit the economy even harder. So even if Obama were to have a brain transplant and realize that the path he has committed himself to is irresponsible and destructive, S&P has a gun to his head and will allow him no retreat.