Doubtful US Treasury debt rating will be downgraded

By DAVID MOON, Moon Capital Management, LLC
June 12, 2011

The three major credit rating companies – Moody’s, Standard & Poor’s and Fitch – are threatening to downgrade their assessment of US Treasury debt.

The rumor is a joke – just like the ratings themselves, especially with respect to US debt.

These bond rating agencies currently describe the creditworthiness of our public debt as AAA, which is the highest and (presumably) safest category.

If the United States of America was a public company however, the rating might more appropriately be in the junk category.

That’s right. As measured by the same accounting standards applied to General Motors, Microsoft or David Moon, the US government is insolvent. The Congressional Budget Office didn’t tell us, nor did the Federal Reserve. Moody’s certainly didn’t.

That news was calculated and publicized by that bastion of in-depth financial journalism, USA Today.

The $14.2 trillion federal debt is both well-known and worrisome. That, combined with the prospect of failing to increase the debt limit, has the rating companies threatening to downgrade our Treasury debt.

That ignores, however, another $61.6 trillion in debt that the federal government simply chooses not to show, acknowledge or even publicly calculate. That’s the current value of the amount of money we’ve promised to pay people. Things like future Social Security payments or Medicare benefits. Those liabilities don’t show on the government’s balance sheet. According to USA Today, that $61.6 trillion is equal to $527,000 per US household.

The average home mortgage in the US is about $172,000.

Don’t hold your breath waiting for any of the bond rating agencies to say anything negative about the federal government. That would be the equivalent of UT Chancellor Jimmy Cheek giving a speech about the immoral and corrupt nature of the NCAA at the Tennessee infractions hearing yesterday.

Both would be suicide.

Moody’s, Standard & Poor’s and Fitch bond ratings are generally a joke. They usually don’t downgrade the credit rating of an issuer until long after the financial problems at the company or municipality are well known. By then, the information is mostly useless.

Guess who pays the bond rating companies? The companies whose bonds are being rated.

The federal government has also made noises about extending its regulatory stick into the business of these companies. When various types of bonds and derivatives began defaulting in 2008, members of Congress blamed the rating agencies, threatening to regulate the methodology the agencies would be required to use to assess creditworthiness.

In an October 2008 Congressional hearing, the CEOs of Moody’s, Standard & Poor’s and Fitch sat in front of Henry Waxman (D-CA) for a dressing down. “The story of the credit rating agencies is a story of colossal failure. They broke a bond of trust... and the result is that our entire financial system is now at risk.”

Congress passing a law telling someone how to assess a balance sheet. Now that’s funny.

Waxman may have persuaded Moody’s, et. al. to look at mortgage derivatives with a more skeptical outlook, but don’t expect the US government to be one of the first issuers the agencies more closely scrutinize.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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