S&P’s Credibility Placed on Negative CreditWatch

S&P Negative CreditWatch Placement And The Knock-On Effects

We have placed S&P on CreditWatch with negative implications, as we believe S&P may be deficient in the 3Rs. Consequently, we could lower its ratings within seven days. We highlight our primary concerns below:

  • Reading: CC+. S&P continues to publish in the font, Courier, despite that it is 2011. We believe that the jig is up. Readers have caught on to the fact that S&P is not punching out credit opinions from behind a manual typewriter. We recommend that S&P use something easier on the eyes of readers, who are likely using a backlit screen. Given S&P’s verbosity, S&P should consider a font with serifs, such as Times New Roman, Cambria, or Garamond.
  • Writing: BBB-. S&P writes convoluted sentences in our view. We believe this may be easily remedied with commas and daily parsing exercises. Of greater concern is the impact that S&P has on everyone else’s writing. Its influential publications have prompted The Wall Street Journal to write about “Treasurys”, The New York Times  to write about “Treasuries”, and online readers who ‘comment’ to use both interchangeably in the span of three sentences. In our view, it should be “Treasuries”. We recommend that S&P confront the confusion by applying its preferred spelling in its next splash-making headline.

    UPDATE: The Financial Times and the Economist also use “Treasuries”, and they are better writers than we are.  Our revised recommendation is as follows: shame downgrade WSJ parent, News Corp. As in its downgrade of US debt, S&P should address politics, insert a sad face emoticon, state the obvious that we got 99 problems but poor spelling ain’t one, and sign off with a super sad face.

  • ‘Rithmetic: D-. S&P’s $2 trillion rounding error falls outside of every confidence interval in the history of the world. We recommend Kumon.

Outlook: Negative. Most of all, we are concerned by the persistence of S&P’s inane ratings system. Republished below in its own words, we note the lack of a logical, even-beat crescendo from the low of D- to the high of AAA+.

The general meaning [emphasis mine] of our credit rating opinions is summarized below.

‘AAA’ — Extremely strong capacity to meet financial commitments. Highest Rating.
‘AA’ — Very strong capacity to meet financial commitments.
‘A’ — Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
‘BBB’ — Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.
‘BBB-‘ — Considered lowest investment grade by market participants.
‘BB+’ — Considered highest speculative grade by market participants.
‘BB’ — Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
‘B’ — More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.
‘CCC’ — Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
‘CC’ — Currently highly vulnerable.
‘C’ — Currently highly vulnerable obligations and other defined circumstances.
‘D’ — Payment default on financial commitments.

Note: Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

In particular, we observe the following worrisome symptoms:

  • There is no DDD or DD when all other letter grades have that spread. There is a BB+, BB, and no BB-
  • “Considered lowest investment grade by market participants” versus “Considered highest speculative grade by market participants” as the difference between BBB- and BB+ means little to market and non-market participants alike
  • The plus (+) / minus (-) footnote suggests that a rating of BBB- (minus), for example, could be rated BBB –+ (minus plus).

In our view, the “general meaning” scale detracts from S&Ps credibility, as it emphasizes how opaque and subjective ratings may be. Worse, the cumbersome notation forces the industry to keep a copy of the reference key, even after decades of experience. We acknowledge that peers, Moody’s and Fitch, offer no better, but we also believe S&P likes to make splashes. Below, please see an excerpt from our initiation report on S&P’s risk-taking profile. As evident even in this early portrait …

… S&P exhibits an industry-best proclivity for puddle-jumping. From what we have observed, its backpack does not contain adequate risk reserves. Indeed, S&P has disclosed that it carries a Rainbow Brite Thermos with a leaky top, an unopened box of Kumon flashcards, a Gameboy, and a one-way pager.  While individually these items are harmless, we note their potential to shock if S&P falls in a puddle, lands on the power button of the Gameboy, and Sunny Delight from the leaky thermos and water from the puddle penetrate the Gameboy and pager. This is a recipe for disaster. Actually, this improbability suggests a downgrade … well shitballs. This is a manual typewriter and there is no backspacing on this inner-turned-outer monologue. Okay CCD+ minus plus with outlook negative. There. Final answer.

We therefore suggest that S&P may achieve its most meaningful splash not by shaking global consumer confidence, but by asserting a universal system for the credit ratings industry. We recommend a simpler scale from 1 to 10, with ‘+’ and ‘-‘ used to refer to the Positive or Negative Outlook call. We believe that the number rating should stand for itself, supported by discussion and metrics featured in a full report.


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