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lquadland10 (< 20)

Second Downgrade.

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April 23, 2012 – Comments (2) | RELATED TICKERS: GS , JPM , WFC

So how is the second debt downgrade working out for you? http://news.yahoo.com/us-credit-rating-downgraded-again-050101872.html

2 Comments – Post Your Own

#1) On April 24, 2012 at 12:50 PM, Valyooo (99.65) wrote:

Who the f%^& is Egan-Jones?  Never heard of them.

My neighbor just upgraded America's debt rating, and so did my dog, so I guess thats 2 upgrades vs one downgrade

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#2) On April 24, 2012 at 2:32 PM, leohaas (36.98) wrote:

I am not all that familiar with Egan-Jones, but I like their business model.

Most ratings organizations are paid by the issuer of debt. This clearly is a conflict of interest. On top of that, the ratings business is competitive: if a ratings organization does not give the issuer of the debt the wanted rating, the debt issuer does not pay the ratings organization and tries to obtain the desired rating from a competitor. This mechanism leads to a ratings bias. It was instrumental in obtaining AAA ratings on most of tranches of CDOs, and thus one of the direct causes of the financial crisis.

Egan-Jones uses a subscription-based business model. Only subscribers typically have access to the ratings. Consequently, Egan-Jones does not have the conflict of interest most ratings agencies suffer from. Just for this reason, I would trust Egan-Jones ratings over Moody's, Fitch, and S&P when it comes to debt from non-currency issuers.

However, when it comes to US debt, I don't trust any ratings agency. The reason is that the US is a currency issuer. It can print all the money it needs, and it will. So it will never default (unless we return to the gold standard). The only risk you run when holding US debt is inflation.

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