The Witch Hunt for S&P

It's hardly news to anyone these days that S&P erred, substantially perhaps, in their rating of sub-prime mortgage bonds, CMOs and related products. Tranches rated AAA ultimately resulted in downgrades to sub-investment grade and even default.  In the aftermath of the credit crisis, investors lost substantial value on these downgrades.

All this, now common knowledge in retrospect, was far less evident to the folks at S&P at the time the ratings were instituted.  This point is corroborated by the fact that largely identical ratings were assigned by Moody's and Fitch on the very same securities now in question.  Mistakes were clearly made and this is why to great degree all rating agencies refer to their ratings as rating "opinions".  Ratings are not designed to be a definitive, official views or to be guarantees or insurance policies.

Be that as it may, as a matter of practice, financial professionals and investors alike had grown accustomed to relying on ratings as a basis of their investment decision, with the markets setting trading levels based upon credit spreads, or the degree to which the given rating departed from the US "AAA".  Whether such reliance is appropriate or prudent, however, is a question that the SEC has chosen to dismiss in its issuance of a Wells Notice to S&P.

With the SEC plan to investigate the rating practices of S&P, the SEC will be arguing that S&P willfully or negligently mislead the market with their ratings on CDOs. This raises several questions, none of which are particularly sensible. Moreover, following the highly publicized downgrade of US Government debt by S&P, and the obvious political embarrassment to the Obama administration, the action also raises a far more troubling question about the depth and breadth of Federal agencies in prosecuting for political, rather than public good.

First, we have to ask, "Why S&P"?  The vast majority of sub-prime mortgage bonds, CDOs and related securities carried in each case more than one rating.  It has long become accepted practice of the bond market to require a minimum of two ratings on each new issue.  So if Moody's and S&P both rated the very same issue "AAA" how is it reasonable that the SEC only finds alleged fraud in the rating of S&P?

Second, if the ratings are credit opinions, and irrespective of whether you accept the rating agencies claim of protection under the first amendment, how is it that the SEC can allege fraud?  No one was forced or coerced to accept or rely under their opinion and, in fact, prudent investors conducted their own in-house, independent credit analysis of the securities.

This now raises the far more dark and terrifying question of whether our government  is capable of the sort of witch hunts, slander and politically motivated prosecutions of a truly oppressive, totalitarian regime.  Despite the best attempts of our current congress to degrade public sentiment toward our government, few Americans truly believe this to be possible.  This is America and we are a democracy, ruled by officials chosen in fair and open elections. 

But to argue that today's SEC action against S&P is purely coincidental and not retaliatory is simply far too unreasonable for us to believe.  The SEC, clearly asleep at the switch throughout the extended market events leading up to the credit crisis, has now further tarnished its reputation by playing the role of bad cop for the Obama administration.

Buffet Rule

Warren Buffet's selfless and noble request of the President, "Please, Mr. Obama, raise my taxes because it's just not fair that us billionaires pay so little...I feel terrible about the whole thing, really I do", was carried forth with lightening speed by the Obama administration, always ready to help, in their quick pronouncement of the "Buffet Rule".  Leave it now to us nagging skeptics to point out the convenience of this plan, just days after Mr. Obama's prime time spending proposal.  The Obama proposal, hastily criticized for its "funding plan to come later language" now springs forth the Buffet Rule, a timely salvo for the proposal's shortcomings.

Mr. Buffet's argument lies in the fact, so he testifies, that he pays a far lower tax rate than his nanny, er, secretary.  It's just so damn unjust, so un-patriotic and so utterly annoying.

Ol' Warren, the sly potato that he is, cleverly fails to point out that his secretary's income is taxed at ordinary tax rates, while the Oracle of Omaha takes no salary from Berkshire Hathaway, preferring his recompense entirely in the form of long-term capital gains.  This small crime of omission, might leave the great huddled masses to mistakenly conclude that rich people don't pay taxes, but so be it.  He's just stating the facts.  Let people draw whatever conclusions they like.  One can only be left to guess if Obbie, too, falls into this class of the unschooled, or if he is just tying to pull a fast one on the American public in an election year.

Call it politics if you like, but it's fundamentally dishonest.  If Buffet was above-board about this whole matter he would have simply, plainly and clearly made the case that what America needs to do to generate additional revenue is raise the capital gains tax rate and, if you agree, thereby make the tax system more fair.  But what Buffet and Obama both knew, of course, is that this kind of frankness would have set off a heated debate about the impact of higher capital gains rates on the already abysmally low rate of investment in America.  And who wants that sort of aggravation?

By couching the argument in the vague premise that he, as the biggest of all fat cats, is making out like a bandit, Mr. Obama can catch the quick shovel pass and, hopefully, carry it unimpeded into the endzone.  After all, who wants to see rich people not pay their fair share?

This media circus follows closely on the heels of Buffet's prior cameo appearance when he rode his white horse in to see Brian Moynihan at Bank of America.  Coming to Warren as an apparition, while he cleansed his sagging privates in the bath, he thought, "Gee, maybe I can lend the Bank $5 billion at preferred rates...not that they need the capital, or anything but just, well, because".  This revelation too, coming within days of his prior visit to the While House.  We can only wait to see what happens next.

Think what you'd like, but I'm thinking that Warren may not be the first fundamentally dishonest billionaire, but he is certainly becoming the most visible.