Irony of the Day: S&P Opinion on Sovereign Debt

US Equity and Bond investors had a tough day.  The reason?  According to most pundits, the proximate cause was the S&P downgrade of UK debt.  Many observers decided that the US might be next.

Bill Gross of PIMCO weighed in

The United States will face a downgrade in "at least three to four
years, if that, but the market will recognize the problems before the
rating services — just like it did today," Gross told Reuters.

Accrued Interest writes in this article, Bill Gross:  Do you trust him? as follows:

Enter Bill Gross, always eager to talk his position. He stokes the fire by saying that the Treasury market is selling off due to ratings fears. Maybe. Indeed, I've heard that Asia is selling today. But always remember, when Bill Gross talks, he is always always always talking from position. So I'm assuming Gross is short Treasuries and today is adding.

No one outside PIMCO knows their position, but Gross is a savvy guy, so he is not speaking to hurt his own fund.

Jon C. Ogg points out that none of this is new information.  Writing in his article, Did Bill Gross Short Sell Stocks & Bonds Via U.S. "AAA" Rating Comments?, he notes the following:

It is easy to add panic to the fire when you get an actual downgrade as
we saw today from S&P on the U.K.  Technically, that is just a bias
downgrade, but that is still enough.  The notion that someone with the
clout of Bill Gross bringing this risk to light is troubling for
investors who have been preparing for the next wave of the economy and
credit to be better rather than worse.

The Irony

There is an exquisite irony in worrying about the S&P downgrade.  This is a company vilified by nearly everyone for the failure to recognize the subprime risk, lamely giving AAA ratings to assets now viewed as "toxic waste."

All of a sudden, we are viewing these guys as the brilliant analysts who know the potential for nations to pay back debt.  Really?

There is a serious public policy issue about government "bailouts" and the debt required.  It is a matter of discussion among many serious economists.  We do not pretend to offer an answer–not yet.  At "A Dash" we are (informed) consumers of such information.

While we are still evaluating the arguments, we can state a preliminary conclusion:  The S&P ratings will not be our first choice.

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  • martin Ferera May 21, 2009  

    touche – nice piece
    I’ve learned not to take comments from the pimco guys at face value.

  • Patrick May 22, 2009  

    I agree with both points. Not even sure why S&P still has a ratings business at this point. Further, the idea that the U.S. would default on its debt is ludicrous. Any weakness in Treasuries from such a silly downgrade by a disreputable company would be a buying opportunity. The kind of opportunity I think this blog looks for.

  • Jason May 22, 2009  

    Someone should audit timing of PIMCO trades against what Bill gross says.
    I wonder though if instead of adding to shorts, Bill is looking to get good prices on the long side?

  • Health Insurance Guy May 26, 2009  

    The ratings folks lost a lot of credibility in light of meltdown in the CDO market. Hard to trust what they say when people are paying them to rate their own instruments.

  • Russ May 28, 2009  

    Agree that the ratings firms (other than independents) are not reliable. But aren’t they still relevant because so many investors (pensions, foundations, banks, others) are restricted to investing in highly rated securities?