The US government got downgraded by S&P because, unlike corporations, they don’t pay the ratings agency any fees, Columbia law professor John Coffee told The Daily Show.
In order to borrow money from the bond market, corporations pay fees to S&P and the other agencies – Moody’s and Fitch — fees that total in the $5 million range. Getting paid by the same people you’re supposed to be objectively evaluating is the definition of a conflict of interest, and that vaunted seal turns into a rubber stamp.
To explain how the racket works, Coffee told Stewart that, “It’s like a baseball league in which the home team hires the umpire, pays the umpire after each inning, tells the umpire that the fee will be “based on the quality of his performance,” and if they don’t like his performance, he’ll never umpire in their stadium again. That’s the functional analogy.”
The problem for the US was that they didn’t play ball. “When we turn to country or sovereign debt, they are not paid for the rating and now they become strangely enough, independent,” said Coffee.
MSNBC’s Bob Sullivan also thinks that the downgrade was an act of revenge against Washington for daring to suggest that they facilitated the economic meltdown of 2008 by rating toxic mortgage garbage as AAA.
Along with Moody’s and Fitch, S&P “systematically inflated their ratings and probably were the group most responsible for the collapse in 2008,” says Coffee in the interview. “The financial collapse couldn’t have happened without them.”
After all the hysteria of the past week, this 7-minute clip is the most cogent explanation I’ve heard of what really went down.