The credit score divide

Today's WSJ has a report on how individuals with middle to low credit ratings are unable to refinance their mortgages.  On the one hand, this means that we are not getting as much economic bounce from 3-4% mortgage rates as we did in earlier recoveries -- and this is the main focus of the article which plays this an equity issue.  Expect to hear more of this in the election.

My take -- sure the stimulus from the Fed is being muted.  But didn't we got into this mess because too many people with low credit ratings got into houses they could not afford?  I don't think the real estate bubble worked out too well before, so why start another one?  Oh, there's an election. 

On debt ratings and recession

Congress and the President come up with a deal to extend the debt ceiling.  They agree to cut $2.5 trillion from deficits for the next 10 years.  And yet Standard & Poors decided last Friday to downgrade US debt from AAA to AA+.  My reaction (which ironically is about the same as Paul Krugman's):

1. Remember that S&P was rating bonds based on subprime mortgages AAA in 2008.  
2. The US Treasury found a $2 trillion error in S&P's initial calculations Friday afternoon before the downgrading was announced.  This raises serious questions about whether the downgrade was based on technical analysis of default probabilities or was made for other reasons. 
3. As the stock market slides for another day, it seems investors cannot get enough US Treasury bonds (yield for two year bonds is now down to 0.2%).  The downgrade sure has not scared them. 
4. No other country is listed at AA+.  AAA countries now include Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey (I did not know these islands in the British channel were a country), Hong Kong, Liechtenstein, Luxembourg, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland and the United Kingdom.  Spain, which is a genuine risk for sovereign debt default, is AA. 

Meanwhile, Dr. Doom (aka Nouriel Roubini of NYU's Stern School) thinks a double-dip recession is becoming more likely in an article in yesterday's FT.  He points out that there is not much that fiscal or monetary policy can do now, and that more attention should be paid to dealing directly with household debt, especially underwater mortgages.  

What's a credit rating firm to do?

New financial regulation bill gets signed last week.  According to WSJ, "the new law regards bond-ratings firms as 'experts' and holds them liable for the quality of their ratings."

Moody's et al say this creates too much risk for them so they immediately refusing to allow their credit ratings to be used on new bond issues.  Slight problem: SEC regulations require these ratings by law. 

For now the SEC has granted a six month waiver allowing bond documents to be issued without ratings.  Which is stranger -- the contradictory dictates of the new financial regulations or the unwillingness of the raters to vouch for the quality of their ratings? 

How many more stories like this will we be seeing in the coming months?