Arancaytar wrote:I'm surprised they didn't do it years ago when the crisis broke out. The rating agencies seemed to have the same religious faith in the USD and the economy that investors had leading up to 2008.
The housing crisis did not hamper the US's ability to pay off its debts. This is a completely separate issue, and is actually easy to understand. Investors like to make money, and one way to make money is called the Mortgage Backed Security (aka: MBS): http://personal.fidelity.com/products/f ... ombs.shtml
A Mortgage Backed Security is a Bond that you can buy. If you buy a $25,000 MBS with a coupon of say, 6.16%, you'll make $1540 a year for several years... then you'll get your $25,000 back in full. This is a real example by the way: you can buy this bond from http://fixedincome.fidelity.com/fi/FIBo ... =31359MEA7
. (Fidelity is just one broker. I'm pretty sure E-Trade offers these as well...)
So if you went to your broker, and bought this bond from them, you'll make $1540 per year, and on the year 2028, you'll get not only the $1540, but the entire $25,000 back. If you bought the bond today, you'd get a total of $49,640 by the year 2028. Obviously, these sorts of things are good for your retirement account. You spend $25,000 today, and that money will nearly double in ~15 years from now. (Note: I'm not a financial adviser. Please do more research before buying bonds. There are a ton of risk factors)
Talking about those risk factors... this "free money" isn't so free. Everything comes at a risk, and THIS
risk is simple. You will only get this money if the people behind your security pay off their loans. In this case, your bond is Mortgage Backed: as long as people pay their Mortgages, you'll get your money. Hell, even if they don't pay their mortgages, the Bank will foreclose on their house, and you'll get your money back as soon as the bank sells their house! Its nearly a risk free investment!!! (And there are other risks of course, but this is "Default Risk", which is the one typically associated with the credit rating)
Wait, millions of people are failing to pay their mortgages? Wait... banks are trying
to foreclose on those houses, but the housing prices are so low that I'm not going to get my money back? Where is my money damn it??!?!?!?
Again, Moodys and the S&P downgraded many MBS securities. Investors lost money as people failed to pay their mortgages on time, and those homeowners lost their homes. Banks got worthless properties (because the housing bubble burst), and everyone was stuck. But the US Government had little to do with it, aside from a few guarantees that they offered to investors. (Some MBS securities were also backed by the US Government). One of the big issues was trying to track down which MBS securities should be downgraded, and which ones were still considered to be safe. The one I linked to earlier is still considered a AAA Rated Bond, so I guess that MBS was safe to hold on to.
The (former) AAA Credit Rating for the US Treasuries is a different matter all together. Instead of lending your money (essentially) to homeowners who want to buy a house... you'll lend your money directly
to the US Government itself. You can buy THESE
bonds from here: http://www.treasurydirect.gov/tdhome.htm
Obviously, the US Government has tons and tons of money. Its highly unlikely that they'll never be able to pay you back, so instead of getting the ~6% that you'd get from a MBS, you'll only get like, 3.5% from a 10-year note. (IE: $25,000 investment will only make $875 a year. The reason why you make less money... is because the US Government is considered more trustworthy than homeowners. People think it is far less likely for the US Government to fail to pay back its loans.
Here's the problem: The US Government came within days
of being unable to pay back its loans. As a result, S&P has decided to downgrade the US Credit Rating. If Congress was more swift on the issue, then perhaps our perfect credit rating would still be around. Oh well, as an Investor, I don't own any Treasuries yet. But with the downgrade, I'll probably get a better rate on the notes.
Too bad the US Government is going to pay more for its debt now...
First Strike +1/+1 and Indestructible.