In March, credit-rating agency Moody's warned that America's top-notch credit rating could be at risk. Thanks to the country's increasingly precarious fiscal situation, "their ‘distance-to-downgrade’ has in all cases substantially diminished."
But how close are we to losing our credit edge? IBD reports:
In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis—so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.
The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody's managing director Pierre Cailleteau confirmed in an e-mail.
Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.
The Congressional Budget Office has been sounding warning alarms for months now. Just a few weeks ago, CBO director Doug Elmendorf gave a presentation arguing that the country is on a "worrisome" fiscal path and that making changes of the necessary magnitude is an urgent task for policymakers.
Showing posts with label Moody's. Show all posts
Showing posts with label Moody's. Show all posts
Tuesday, May 11, 2010
Saturday, April 24, 2010
How did Wall Street get flawed mortgage securities past raters? Reverse engineering
One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good.
One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.
In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees.
The major credit rating agencies, Moody’s, Standard & Poor’s and Fitch, drew renewed criticism on Friday on Capitol Hill for failing to warn of the dangers posed by complex investments like the one that has drawn Goldman Sachs into a legal whirlwind.
But while the agencies have come under fire before, the extent to which they collaborated with Wall Street banks has drawn less notice.
The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds — companies and states, for instance — wouldn’t be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate.
But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings.
One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.
In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees.
The major credit rating agencies, Moody’s, Standard & Poor’s and Fitch, drew renewed criticism on Friday on Capitol Hill for failing to warn of the dangers posed by complex investments like the one that has drawn Goldman Sachs into a legal whirlwind.
But while the agencies have come under fire before, the extent to which they collaborated with Wall Street banks has drawn less notice.
The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds — companies and states, for instance — wouldn’t be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate.
But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings.
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