Then yesterday after this story it seemed like S&P was forced to reconsider downgrading the US after the White House challenged the S&P's findings, apparently on CNN, S&P admitted they had some errors in their calculations. Remember, the US government "could" pull their license.
Then S&P does what seemed to be off the map only a few short hours later and downgrades the US long-term outlook from the much coveted Aaa to AA+.
But it doesn't stop there, apparently standing at the ready, Bernanke, the Federal Deposit Insurance Corporation, the National Credit Union Association and the Office of the Comptroller of Currency- all issued a joint statement with media contacts for each organization:
Agencies Issue Guidance on Federal Debt
Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations)
For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.
In essence, the statement above tells banking institutions, whatever effects the S&P downgrade would have on their holdings and whatever adjustments they would need to make under the guidelines of the governing bodies that issued the joint statement, IGNORE THEM and carry on as if there had been no S&P downgrade.
Apparently S&P had given notice to the Treasury Department early Friday, the White House challenged their findings, they admitted to mistakes and made amendments, but the bottom line was still a downgrade. The text of the downgrade reads like a scathing admonition of the White House and both political parties as being dysfunctional; as well as tax laws for the rich and corporations, entitlement programs and Medicare reform. The Treasury Department, which issued a statement after the S&P action said, "The error that S&P made was critical, the baseline of savings needed to avoid a downgrade was $2.1 trillion dollars, not $4 trillion and that. A Judgement flawed by $2 Trillion dollars speaks for itself".
Representative Barney Frank had his own scathing statement for the S&P,
S&P "Was trying to justify their reputation after failing to spot problems in the nation’s financial system before the economic crisis of 2008. These are some of the people who have the worst records of incompetence and irresponsibility around"
Representative Jim Demint put blame directly at Geithner's feet saying, the Treasury Secretary had pushed for months for an increase in the debt ceiling with no spending cuts, claimed he was irresponsible and reckless and should be replaced immediately. We all probably remember Geithner's answer to the question "Is there a risk the US could lose its triple A rating?" and Geithner's response, "No risk of that" questioned again, "No risk?", his answer, "No Risk".
As for the fallout, 10-year Treasury bonds were at a very low 2.56% after the S&P action, implying that there wouldn't be much effect on treasuries. For now, the single downgrade (as Moody's and Fitch reaffirmed the triple A status earlier in the week) will likely have little effect on institutional investments in treasuries, had all 3 acted, the response would probably have been catastrophic for Treasuries. Wall Street analysts claim if all 3 agencies had downgraded the US, interest payments by the Treasury would likely have risen by $100 billion a year and would have had wide ranging effects on home owners, consumers and college student loans; that amount is just shy by about 15% of the cost of the Afghanistan war per year.
Predictions are already coming in that the Fed will extend some form of Quantitative Easing and may hint at that as early as next week, to help stabilize Treasuries after the S&P downgrade. As far as other countries holding US debt, they may not like it, but it is still the best choice of a range of bad choices.
As I have already questioned, and now even more so, I really wonder what the true nature and conversation was about last Friday when the Fed called the 20 major investment banks/primary dealers to it's offices for a conference. Like I have been saying for years, Wall Street is far, far ahead of us on the information curve and what you see in the market today was almost certainly planned weeks ago or even longer. Think of the treasury rally this week, made possible only by the equity decline. Slowly I think we will find out why we have seen such amazing divergences in 3C.
American's financial situation in even greater jeopardy. In fact I would not be surprised to see a Tea Party candidate, which may in fact be Ron Paul by then as I doubt the Republican establishment will back him, may in fact win the presidency. Not even the lobbyists stand a chance by a ground swell grass-roots, authentic movement by the people. It may in fact be the biggest uprising since July 4th, 1776.
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