Tuesday, April 23, 2013

Goldman now recommends closing short gold positions. S&P argues that their ratings are not to be taken at face value.

Jesse has 2 excellent posts today.  The first is about Goldman Sachs and their prescient call approximately 2 weeks ago to short gold.  Yesterday Goldman publicised a recommendation to close gold short positions.  There were rumors last week that Goldman was buying gold during the price smack-down last week for their own account.

I am shocked, shocked that Goldman would recommend one thing for their clients while doing the opposite!!!
In the second part of this post he takes the much publicized economist Paul Krugman to task for using a 'we failed to notice' excuse.  Jesse's points out that if Krugman failed to notice the bubbles and corruption that led to the 2008 financial crisis, what is he over-looking now?

Jesse's second post is commentary about Standard & Poor's (S&P) unusual legal defense of the Justice Department's civil lawsuit.  

For background S&P is a ratings agency.  Their business is to provide ratings that indicated the risk of specific investments, such as bonds issued by corporations, municipalities, and countries.  This is big business.  S&P has over 6,000 employees worldwide and publishes rating for over $3.5 Trillion of new debt in 2011.  S&P's ratings, such as investment grade or 'AAA' are very impactful.  For example, most bond funds are restricted by their charter to invest in debt instruments with only certain ratings.  In that way the interest rate that is charged to a municipality is dependent upon the rating assigned by S&P.

S&P had rated much of the mortgage backed securities that turned out to be junk in the 2008 financial crisis.  The US justice department is pursuing a civil case against S&P for fraudulently, knowingly assigning better ratings to these risky investments.

From the Wall Street Journal article on the subject:
Now, lawyers defending the company against the Justice Department's recent civil lawsuit say that statements about independence and objectivity are "puffery" and were never meant to be taken at face value by investors

This is absurd.  S&P is arguing that their product, ratings is not to be taken at face value.  Then what do all the bond issuers pay S&P for?  Why do investors pay any attention to S&P ratings?  

As Jesse succinctly puts it:
"And now we have the ratings agency defense: It can't be fraud, because everyone knows we are not objective and independent, even though we say we are and sell our services based on that claim.

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