Having Standard & Poor's downgrade the creditworthiness of the U.S., and warn the country about further downgrades, is a little like having the Catholic Church lecture Scout leaders on the proper behavior toward boys. The moral authority seems to be wanting. S&P, you may recall, is one of the ratings agencies (the others being Moody's and Fitch) that greased the skids of the financial crisis by awarding AAA ratings to tranche after tranche of mortgage bonds called collaterized debt obligations, or CDOs. Recall that, unlike U.S. Treasuries, backed by the full faith and credit of the U.S., CDOs were underwritten by garbage mortgages — that is, backed by no-documentation “liar loans” and other Alt-A subprime pond scum handed to borrowers who otherwise couldn't get a nickel's worth of credit at their local dry cleaner.
S&P stamped CDOs with the same grade it previously awarded to a precious few companies, including Exxon and Microsoft. More than 30,000 CDOs got the AAA blessing from the agencies. S&P couldn't pull its snout out of the trough even when it became apparent in 2007 that the mortgage bond pig-out was over. This e-mail from an S&P employee, uncovered by a congressional investigation, says it all: “Let's hope we are all wealthy and retired by the time this house of cards falters.” In their absorbing history of the financial crisis, The Devils Are All Here, Bethany McLean and Joe Nocera bared the behavior of the agencies. Even when their own analysts began sounding the alarm, senior management refused to stop the money machine. And if the analysts became insistent on being scrupulous, the agencies got new analysts. Why? Because their clients, big banks such as Lehman Brothers and Goldman Sachs, demanded that the CDO machine keep on cranking, until it utterly collapsed.