Why Aren't Rating Agencies Moving U.S. Treasuries to Junk Bonds?

In my last article I talked about the folly of rating agencies and US financial system. Considering the junk that most US financial companies hold today without disclosing it openly and that the US government is slowly acquiring that junk by giving them dollars for it, I wonder why rating agencies are not downgrading the US treasury rating to junk. The system of fiat money is very interesting because a government can print as much of it as it wants. And the US government must have installed a few new printing presses recently to provide all the dollars it's showering on failed financial institutions, its war and its public in general.

Even after going through this mess for almost a year now, US political leaders have the guts to talk about tax cuts to wealthy people and allowing totally non-deserving people to stay in their homes. It's like a free economy where you are entitled to live beyond your means because you are guaranteed loans and credit from investors around the world. How long can the US government continue to deceive other countries of the world? Most governments borrow money to improve the infrastructure in their countries, while the US government borrows it to lavishly spend on wars, to provide $200K houses and $25K cars to people with no means to pay for it and to allow its wealthy people to lower their taxes. And most unfortunately, everyone seems to be ok with it.

But the disastrous consequences of this are being felt all over the globe. I wonder if rating agencies will work again in a reactive manner in this case by taking action only after every global investor realizes the folly of it. Or will they have the courage and wit to inform global investors by acting proactively? Because if fiat money allows the US government to maintain its AAA ratings, then every country in Africa or the third world should also get a AAA rating.

In either case, it's not too far away before global investors, including China and other Gulf countries, realize their mistake. However, their dilemma might be accentuated by the fact that they already hold big amounts of debt of US treasury. I think it's not the US financial companies which should get their act together, but actually the US government which should get its act together first. Is it not surprising to anyone that officials talk about the free market when oil goes to $147/barrel, but when a financial institution fails, they spend their weekends acting as mediators and facilitators. The whole US financial system, including the US Treasury, has been converted into a house of cards over the last few years.

So unless the sound restructuring process begins, deep pocketed investors will be better off shorting the US treasury bonds. For average investor, I would suggest shorting bank and financial services stocks. With Bank of America (BAC) agreeing to acquire Merill Lynch (MER), currently Citigroup (C), AIG (AIG) and Bank of America top that list.

Stock position: None.

Comments

[AAA+:]

The agencies only move after the event. Lehman's AA on Friday and Chapter 11 on Monday!! Since Merkel and Sarkosy were negatively vocal about them last year there seems to be deathly silence since. I am guessing they must be huge contributors to the members of the Select Finance Committee like 2 GSEs we know.

2008 Sep 15 04:54 AM