Arizona Eagletarian

Arizona Eagletarian

Monday, May 11, 2015

Scrooge McDucey's head fake on budget and finance

On May 5th (Cinco de Mayo), Scrooge McDucey sent out a self-congratulatory (propaganda) email boasting how his AUSTERITY plan has already brought about a boost to the State of Arizona's credit rating.
This morning the highly renowned bond credit rating agency, Moody's Investors Service, announced it has upgraded Arizona's credit rating to Aa2, with a "stable" outlook.
In their announcement, Moody's said the rating increase "reflects the state's positive economic trends, significantly improved liquidity (asset) levels (and) budget actions expected to eliminate a structural imbalance."
What's the problem with that, you ask? Let's start with the first phrase, designed to fake you out with a specious claim suggesting Moody's credit rating service has anything to do with anything.

"[T]he highly renowned bond credit rating agency..." Now, IF Moody's really was a "highly renowned" organization, why would ol' Scrooge need to tell you before saying anything else? If Moody's really was credible, why not either provide EVIDENCE of that credibility, or simply let the organization's claims speak for themselves?

Instead, McDucey expects us to not notice that he told us a fib right off the bat. A McClatchy report from 2009 states,
WASHINGTON -- As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."
As Congress tackles the broadest proposed overhaul of financial regulation since the 1930s, however, lawmakers still aren't fully aware of what went wrong at the bond rating agencies, and so they may fail to address misaligned incentives such as granting stock options to mid-level employees, which can be an incentive to issue positive ratings rather than honest ones.
The Securities and Exchange Commission issued a blistering report on how profit motives had undermined the integrity of ratings at Moody's and its main competitors, Fitch Ratings and Standard & Poor's, in July 2008, but the full extent of Moody's internal strife never has been publicly revealed.
Even the bias-averse Wikipedia (they scrub anything that presents even the appearance of bias) goes so far as to cite Moody's business model as suspect.
The "issuer pays" business model adopted in the 1970s by Moody's and other rating agencies has been criticized for creating a possible conflict of interest, supposing that rating agencies may artificially boost the rating of a given security in order to please the issuer. The SEC recently acknowledged, however, in its September 30, 2011 summary report of its mandatory annual examination of NRSROs that the subscriber-pays model under which Moody’s operated prior to adopting the issuer pays model also "presents certain conflicts of interest inherent in the fact that subscribers, on whom the NRSRO relies, have an interest in ratings actions and could exert pressure on the NRSRO for certain outcomes". Other alleged conflicts of interest, also the subject of a Department of Justice investigation the mid-1990s, raised the question of whether Moody's pressured issuers to use its consulting services upon threat of a lower bond rating.

Read more here: http://www.mcclatchydc.com/2009/10/18/77244/how-moodys-sold-its-ratings-and.html#storylink=cpy
Given the evidence, and the fact that McDucey knew of the need to try to bolster the credibility of his (and Moody's) claims, he goes for the head fake before presenting the information he wanted you to remember.

Additionally, even more recent than the McClatchy report, in 2011 The Guardian carried a story citing a former Moody's senior vice-president that further calls Moody's analyses into question.
A former credit-ratings agency executive has launched a stinging attack on the powerful organisations that can damage countries' economies and wreak havoc in the markets with the stroke of a pen.
William Harrington, a former senior president at Moody's, claims the organisation's senior management interfere with analysts' independent assessments.
Ratings agencies have attracted international opprobrium after Standard & Poor's, another of the three big agencies alongside Moody's and Fitch, stripped the United States of its gold-standard AAA rating.
Harrington, who worked at Moody's for 11 years until he resigned last year, said ratings agencies suffer from a conflict of interest because they are paid by the banks and companies they are supposed to rate objectively.
"This salient conflict of interest permeates all levels of employment, from entry-level analyst to the chairman and chief executive officer of Moody's corporation," Harrington said in a filing to the US financial regulator the securities and exchange commission (SEC), which is considering new rules to reform the agencies.
Harrington claims that Moody's uses a long-standing culture of "intimidation and harassment" to persuade its analysts to ensure ratings match those wanted by the company's clients. He says Moody's compliance department "actively harasses analysts viewed as 'troublesome' " and said management "rewarded lenient voting".
"The goal of management is to mould analysts into pliable corporate citizens who cast their committee votes in line with the unchanging corporate credo of maximising earnings of the largely captive franchise," he said in the 78-page filing submitted earlier this month. [Note that because The Guardian is a British publication, some of the spellings differ from what is traditionally used in American English]
Back to Scrooge McDucey's subterfuge.
So what does this upgraded credit rating say about Arizona?
  • It says that Arizona is a good investment.
  • It says that Arizona is open for business.
  • It says that Arizona is fiscally responsible.
  • It says that Arizona is headed in the right direction.
The fact of the matter is that IF use of Moody's rating and analysis was fundamentally sound, McDucey wouldn't have had to resort to misdirection to get people to believe the claims.

What Moody's report really says about Arizona is that it doesn't think it will get in trouble for vouching for the low risk inherent in debt instruments issued by Arizona state government.

It also says NOTHING about whether any other investment any business might make in any aspect of Arizona's economy is good, bad or indifferent. Further, it absolutely does NOT provide ANY evidence that Arizona's state government is at all fiscally responsible. The facts would suggest just the opposite. The current crop of lawmakers controlling the legislature (Republican) and Scrooge McDucey can only be judged as fiscally responsible IF that term is defined as driving state government into the ground.

Or, as my good friend state Rep. Andrew Sherwood describes it,
They've welded the gas cap shut, punctured the tires and poured sugar in the engine. Now they are telling people that the car is unreliable.
Last but far from the least, Moody's report says NOTHING about the direction Arizona is headed. Other indicators are, however, available to tell us the truth on that issue.

For example, when school districts are having to go to 4-day school weeks because McDucey and the legislature have cut funding, Arizona's not headed in the right direction.

As you can imagine, I could go on and on and on demonstrating how and why Arizona, with the current REPUBLICAN leadership is headed in exactly the opposite of the right direction, and the decisions they make are increasingly fiscally IRRESPONSIBLE when measured against metrics that describe quality of life for Arizonans.

I'll leave it to another post, for surely this trend will continue at least until we can change the direction by electing representatives and a governor who are not governed by the dominant framework of Ronald Reagan, Charles and David Koch, and Grover Norquist.

Given the very recent history of Kansas and McDucey's forerunner (Sam Brownback), what McDucey may really want is to grease the wheels for issuing more debt (than we already have) when the inevitable cash crunch that austerity will bring actually hits.

What happens when a person has a debt that can not be paid? Well, you go bankrupt. If you are a nation state, like Greece, and you have been straddled with debt from a small group of criminals, like the Troika (ECB, BOE and IMF) you have a couple of choices. You can allow the criminals to steal everything your country has that is valuable or you can stand up to them like Prime Minister, Alexis Tsipras and Finance Minister, Yanis Varoufakis have done and begin making demands. If you are the State of Kansas in the United States, well, you issue more debt to pay off the old debt and set policies based on hopes and dreams. 
The bottom line is that Arizona is headed in the wrong direction under the current governor and legislature. It's time for an about face. It's time for genuinely fiscally responsible elected officials. And the current crop of Republicans just ain't capable of getting that job done.

Today it is a case of the grasshopper pitted against the elephant. But tomorrow the elephant will have its guts ripped out. Le Loi, Vietnamese emperor, 15th Century.

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