Is S&P’s Deficit Warning On Target?

By Simon Johnson

On Monday Standard & Poor’s announced that its credit rating for the United States was “affirmed” at AAA (the highest level possible), but that it was revising the outlook for this rating to “negative” – in this context specifically meaning “that we could lower our long-term rating on the U.S. within two years” (p.5 of the report).  This news temporarily roiled equity markets around the world, although the bond markets largely shrugged it off.

While S&P’s statement generated considerable media attention, the economics behind their thinking is highly questionable – although, given the random nature of American politics, even this intervention may still end up having a constructive impact on the thinking of both the right and the left.

It is commendable that S&P now wants to talk about the U.S. fiscal deficit – one wonders where they were, for example, during the debate about extending the Bush-era tax cuts at the end of last year.

The main problem is that S&P did not lay out even the most basic numbers or even point readers towards the nonpartisan and definitive Congressional Budget Office analysis of medium- and longer-term budget issues.[1]  This matters, because the CBO numbers definitely do not show debt exploding upwards immediately from today – if you’ll take the time to look at Table 1.1 in the latest CBO report, the line “debt held by the public at the end of the year” (meaning private sector holdings of federal government debt; excluding government agency holding of government debt) makes it clear – debt as a percent of GDP rises to 75.5 percent at the end of 2013 and then increases very little through 2019.

There are two serious budget issues made clear by the CBO’s analysis.  First, the big increase in debt in recent years has been primarily due to the financial crisis.  To see this, compare the January 2011 CBO forecast (cited above) with its view from January 2008 (see page XII, Summary Table 1), before the seriousness of the banking disaster – and ensuing recession – became clear.  At that point, the CBO expected federal government debt relative to GDP to reach only 22.6 percent (compare with 75.3% for the same year, 2018, from the 2011 projections.) 

In other words, the financial crisis will end up causing government debt to increase by more than 50 percent of GDP over a decade.  This is the major fiscal crisis of today and our likely tomorrow (for more on this, see this column).

S&P does mention this issue, but somewhat elliptically, when it says “the risks from the U.S. financial sector are higher than we considered them to be before 2008” (p.4).  And S&P does put “the maximum aggregate financial sector asset impairment in a stress scenario at 34% of GDP, compared with our estimate of 26% in 2007” (p.5).

But there is no indication of where these numbers come from – and no sense that S&P is focused on the likely medium-term fiscal cost of financial disaster (as seen in the CBO numbers), as opposed to any kind of “up-front” commitment by the government (part of which would not constitute ultimate losses).

A future financial crisis, given the nature of our economy, could well cause a debt increase of more than 34% of GDP – just look at what happened this time in the US or the way in which Ireland was ruined by big banks and the relevant politicians gone mad.  There is no way that the S&P’s stress scenario is sufficiently negative. 

To be fair, the CBO also does not present a realistic stress or alternative scenario along these lines; this is a problem with current CBO scoring methods that needs to be addressed.  The International Monetary Fund is already pressing, for example in its latest Fiscal Monitor (see Appendix 3, particularly the web of risks shown on p.84), for all countries to recognize more fully the probable future fiscal costs implied by contingent liabilities of all kinds arising from large and reckless financial sectors.[2]

There is of course a longer run budget issue – beyond 2020 – which is mostly about healthcare costs.  S&P follows the current consensus by flagging the Medicare component of this and the CBO’s own projections on this front are undoubtedly scary (see this CBO webpage; or jump direct to the document and study the picture on its front page).

But the real threat to the economy is healthcare costs more broadly, not just the Medicare component.  For more on this see the analysis by James Kwak (my co-author) writing about an important letter from Doug Elmendorf (head of the CBO) to Congressman Paul Ryan on the latter’s budget proposal.  In James’s words, “The bottom line is that the Ryan Plan increases beneficiary costs more than it reduces government costs.”

The real danger to the United States economy – and to its federal budget – is that we will somehow derail growth, either by letting too big to fail banks become irresponsible again or by allowing healthcare costs to continue to rise on their current trajectory or in some other way.

It is disappointing to see S&P miss the opportunity to bring clarity to this issue.  The organization still seems hampered by some of the same weak analytics that contributed to their misreading of subprime mortgages and associated derivatives.

Will their broad brush and somewhat indiscriminate warning spur politicians to sensible debate and eventual action – both with regard to the financial system dangers (the medium-term issue) or with regard to healthcare costs (the longer-term issue)? 

Perhaps, but this sort of “warning” may also whip up debt hysteria of a kind that can quite easily lead to policies that quickly undermine growth.

An edited version of this post appears this morning on the NYT.com’s Economix blog; this material is used here with permission.  If you would like to reproduce the entire column, please contact the New York Times.


[1] Disclosure: I’m on the Congressional Budget Office’s Panel of Economic Advisers.  This Panel meets twice a year to discuss economic forecasts.  Attendance at the panel is paid.

[2] Disclosure: I attended a Fiscal Forum at the IMF last week where these issues were discussed.  I was paid an honorarium.

56 responses to “Is S&P’s Deficit Warning On Target?

  1. bobgreenfest

    I’m actually surprised you’re writing about this as the concept of S&P reviewing the United States credit rating is so silly in every form. First, as long as “full faith and credit” remain in place, which it must, review of the US credit rating is a non issue as it will always be at whatever level is above AAA. Next, who really cares what S&P says? If these people had any modicum of knowledge, they would have alerted investors to real financial downfalls that have occurred, rather than merely allowing themselves to go to expensive lunches with Wall Street executives and buy into Wall Street’s lies. Maybe S&P should spend time trying to really understand securities they get paid to review, rather than participating in what seems like a bad grad school project of reviewing the credit rating of our country. Additional insights can be found at http://bit.ly/33nr7Q

  2. I think S&P also misses the point that the value of the credit of the USA is in relation to the value of the credit of other countries. Does this mean they will be raising the credit value of other counntries vis a vis the USA? Do they consider the renimbi or ruble possible better risks in the future? I think not.

  3. First, the big increase in debt in recent years has been primarily due to the financial crisis…

    In other words, the financial crisis will end up causing government debt to increase by more than 50 percent of GDP over a decade.

    That’s an anodyne way of putting it. I’d put it more like: The banks and government triggered the financial crisis to give themselves a disaster capitalist pretext to radically escalate the government’s redistribution of wealth from the productive citizenry to the parasite banksters. This disaster capitalist onslaught is the Bailout, and this new command economy regime is Bailout America.

  4. Bruce E. Woych

    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=6637

    TRNN (The Real News Network):

    April 19, 2011
    Why Did S&P Issue Warning on US Bond Rating?
    Kevin Hall and Mark Weisbrot discuss reasons for Standard and Poor’s warning US could lose AAA rating

  5. Bruce E. Woych

    Just as credit rating have an instant impact on Wall Street speculators and can negatively impact a sell off / flash crash style capital flight…this “verbal warning” becomes very suspicious as to the potential it has to push capital flow to favor short selling profits by destabilization tactics that are well known and practiced at corporate levels. There is no reason not to entertain the notion that sovereign entities are not being played off of each other with the same model routinely utilized by corporate hedge funds to short markets…but at greater scope and of course more dangerously dramatic consequences to whole economies. But then,…what else is New in this Neo-Confidence gaming of the global casino?

    Given that these market rating agencies have a current history of rating manipulation (the notorious mis-ratings of class “JUNK” in recent years as AAA investments)…one can not dismiss the possibility that “devaluation” doesn’t also have its price in this high stakes backroom dealings of this off shore driven global world of financial greed.

    Afterall…no one can accuse them of anything for a “warning…” yet it has virtually the same “impulse” effect on the immediate market directions. Gaming the system is a high finance strategy; but doing it right in front of everyone (big time) and not getting caught…well; that seems to be the play of the big game hunters these days (Looting the Treasury still tops them all beyond imagination ! ) Just another “Inside Job.”

    (There are some details left out here, (but some added too) from comments I posted at TRNN yesterday. If you are interested further see those @

    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=6637

    TRNN (The Real News Network):

    April 19, 2011

  6. Herbert Wetherby

    . First, as long as “full faith and credit” remain in place, which it must, review of the US credit rating is a non issue as it will always be at whatever level is above AAA. Next, who really cares what S&P says?

    Here is where your logic is flaud. Your statement assumes the Fed can account for the rising rates, ( or lack there of), instead the Fed and dollar are sinking each and every day. Its almost as if they missed the bus, and now need an excuse from mom to stay home cause they have no car.

  7. You state that “the big increase in debt in recent years has been primarily due to the financial crisis.” That analysis is not consistent with the numbers in the CBO report. Consider both the revenue and outlays in the two CBO reports. We have not only a revenue problem, but also a spending problem.

    2008 projections for 2009-18:
    total revenue – $36.6T
    total outlays – $36.4T

    2011 projections for 2012-18 + 2009-11 data:
    total revenue – $31.4T
    total outlays – $41.4T

    Yes, revenues decline by $5.2T, but spending also increases by $5.0T. The 2008 CBO report projected U.S. public debt to $5.1T, the 2011 CBO report projects that debt at $15.8T, a $10.6T difference. Little more than half of that difference is due to reduced revenue, the other half is due to increased spending.

  8. “The real danger to the United States economy – and to its federal budget – is that we will somehow derail growth, either by letting too big to fail banks become irresponsible again or by allowing healthcare costs to continue to rise on their current trajectory or in some other way.”

    Indeed. :)

    But why be coy about “some other way”? Allowing unemployment to drift at a high level is holding back growth right now.

  9. I assume that S&P is run by people who support Republican ideology. Is it possible they did this in order to put pressure on the spineless democrats to capitulate giving the tea baggers all of their demands such as planned parnethood, public broadcasting, EPA regs, etc?

  10. @Russ — the Bailout was “only” 10% of GDP; maybe 15 or as much as 20% if you include the unearned income banks have been earning on their excess Fed deposits as part of the bailout.

    The recession cost 50% of GDP. Part of that was the “automatic stabilizers”. Part was because revenues decreased while spending didn’t (see Simons bloomberg article http://www.bloomberg.com/news/2011-04-19/fiscal-conservatives-dodge-10-trillion-debt-simon-johnson.html). The banksters weren’t able to capture all of that (although they are still trying and may yet succeed).

    Ultimately, they don’t really care who they get the money from, as long as they get it. Perhaps you can console yourself that when they have sucked the general populace dry they will turn on each other.

  11. Steve from Cranbury

    Dr. Johnson, Agree with your points. Also found the comments about “full faith and credit” as well as the huge damage deficit hysteria will do on our economic recovery.

    That said, let me add a couple of thoughts:

    1. While we certainly need a larger, well designed
    stimulus package II to get the economy back near
    full function, this should not preclude a deep
    review of how we can step down our federal
    deficit once we’ve got the economy going. Neither
    political party is willing or capable of
    constructively managing down the deficit. We
    should get rid of them.

    A related point is the trade deficit. This is
    currently about $10 trillion. We have offshored
    so much of our manufacturing of necessities
    (toasters, chinos, you name it)that there is no
    way we can manage down our trade deficit. Also,
    we won’t be able to restore sufficient job growth
    without rebuilding our manufacturing base.
    Yet neither party addresses this issue either.
    Its obvious why not — Corporate America depends
    on cheaper foreign labor as well as foreign tax
    holidays and investment credits to maintain its
    profit margins. Again, we need to get rid of
    both political parties and get big money out
    of not only our elections, but also political
    advocacy advertising. We need to amend the
    Constitution to retract corporate personhood
    in the political arena.

    2. This whole S&P downrating threat is a ludicrous.
    The credit rating agencies are not credible.

    However, while ludicrous,the S&P threat IMO
    forebodes are very dangerous threat.

    If I were a big TBTF bank now generating most of
    my profits on uber low open market window loans
    invested in Treasuries or fueling hedging and
    other high risk, high profit speculation, why
    not urge the credit rating houses to eventually
    downrate US debt?

    The big banks and financial outfits will use this
    threat to capture Social Security and Medicare
    funds via privatization to fuel their speculation
    based profits when the Fed eventually has to
    raise interest rates.

    While seemingly crazy, it think there is a strong possibility the right wing corporate types are using
    the S&P rating service to force privatization of
    Social Security and Medicare.

    Why not? They can make a huge profit on these funds
    and they can satisfy their “eat what you kill” economic ideologies at the same time.

  12. Steve from Cranbury

    Dr. Johnson, Agree with your points. Also found the comments about “full faith and credit” as well as the huge damage deficit hysteria will do on our economic recovery.

    That said, let me add a couple of thoughts:

    1. While we certainly need a larger, well designed
    stimulus package II to get the economy back near
    full function, this should not preclude a deep
    review of how we can step down our federal
    deficit once we’ve got the economy going. Neither
    political party is willing or capable of
    constructively managing down the deficit. We
    should get rid of them.

    A related point is the trade deficit. This is
    currently about $10 trillion. We have offshored
    so much of our manufacturing of necessities
    (toasters, chinos, you name it)that there is no
    way we can manage down our trade deficit. Also,
    we won’t be able to restore sufficient job growth
    without rebuilding our manufacturing base.
    Yet neither party addresses this issue either.
    Its obvious why not — Corporate America depends
    on cheaper foreign labor as well as foreign tax
    holidays and investment credits to maintain its
    profit margins. Again, we need to get rid of
    both political parties and get big money out
    of not only our elections, but also political
    advocacy advertising. We need to amend the
    Constitution to retract corporate personhood
    in the political arena.

    2. This whole S&P downrating threat is a ludicrous.
    The credit rating agencies are not credible.

    However, while ludicrous,the S&P threat IMO
    forebodes are very dangerous threat.

    If I were a big TBTF bank now generating most of
    my profits on uber low open market window loans
    invested in Treasuries or fueling hedging and
    other high risk, high profit speculation, why
    not urge the credit rating houses to eventually
    downrate US debt?

    The big banks and financial outfits will use this
    threat to capture Social Security and Medicare
    funds via privatization to fuel their speculation
    based profits when the Fed eventually has to
    raise interest rates.

    While seemingly crazy, I think there is a strong possibility the right wing corporate types are using
    the S&P rating service to force privatization of
    Social Security and Medicare.

    Why not? They can make a huge profit on these funds
    and they can satisfy their “eat what you kill” economic ideologies at the same time.

  13. @Steve, who says “While seemingly crazy, I think there is a strong possibility the right wing corporate types are using the S&P rating service to force privatization of Social Security and Medicare.

    Why not? They can make a huge profit on these funds
    and they can satisfy their “eat what you kill” economic ideologies at the same time.”

    What the heck is so crazy about that?

    What’s crazy is neither Dr. Johnson nor James Kwak CALLING THEM ON IT.

  14. Stephen A. Boyko

    There were three corruptive information errors missed by S&P that were causal to the subprime crash:

    1. Mischaracterization of no-money down, NINJA CDO that conflated risk and uncertainty resulting in mispricing subprime debt as AAA.

    2. Misuse of wrong tool (e.g., using hammer to drive a screw) where owners gave property rights to renters creating perverse incentives for property foreclosures.

    3. Misapplication of correct tool (e.g., using hammer handle to drive a nail) where the CDO portfolio tranches used the standard deviation as a measure of variability instead of the variance. Without informational correlation the less robust variance measure of randomness is used instead of the standard deviation. Attempting to hedge non-correlative assets minimizes the value of both resources as the reliability of price information is corrupted.

    S&P’s deficit warning begs the fundamental market question of what did God invent first—sheep or fleecing?

  15. So, S&P, which contributed a share for the 2008 financial conflagration, is now going to give the US Federal government a negative outlook because it is suffering the consequences of said conflagration.

  16. Simon Johnson considerably understates S&P’s role in the financial crisis — understandable reservation on the part of someone interested in moderate, rational discourse. (Moderate in a tonal sense, not a political sense.) S&P, however, has shown no evidence or or inclination to moderation. We have good reason to believe that S&P officials deliberate misrepresented facts in order to serve the Wall Street lusts that lead to financial crisis.

    What reason do we have to believe that S&P is any more inclined to honesty now than it was 3 or 4 or 10 years ago? None.

    What we do have is unambiguous evidence of a broad spectrum of Wall Street executives — with the full and willing aid of Obama and almost all of Congress — protecting themselves from both criticism and responsibility.

    So we have every reason to doubt what S&P is up to with its ‘warning’.

    We know further that the most obvious step that could be taken — near and long term — to address fiscal issues would be (1) to increase, significantly, taxes on the wealthiest 10% (and especially the wealthiest 1%) of Americans, and (2) to drastically increase the legal and financial liability of Wall Street executives for malicious, calculated irresponsibility. The Lloyd Blankfeins need to face the kind of prison time faced by someone holding an ounce of marijuana. Instead, as Angelo Mozilo proves, they are being _rewarded_ for their crimes.

  17. Bruce E. Woych

    A power train statement of facts:

    http://rwer.wordpress.com/2010/07/04/galbriaths-statement-to-the-commission-on-deficit-reduction/

    Galbraith’s statement to the Commission on Deficit Reduction

    Statement to the Commission on Deficit Reduction
    by James K. Galbraith, Lloyd M. Bentsen, jr. Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, and Vice President, Americans for Democratic Action. June 30, 2010.

    http://rwer.wordpress.com/2010/07/04/galbriaths-statement-to-the-commission-on-deficit-reduction/

    The University without Borders…

  18. Bayard Waterbury

    Simon, I think that really, considering the S&P track record in recent memory, most of those who are at all sanguine took their pronouncement with a grain of salt. That having been said, I am still much less than sanguine about the “recovery” which seems to be horizontal at best, and certainly an extremely slothful movement upward.

    I am no economist, although I can follow any discussion, I am still quite jittery regarding our potential trajectory over the next few years. It still seems incredibly shaky to me. My problem is that most of what we hear and read from Washington and the media seems overly optimistic. Yes, Wall Street and its markets take joy in the good earnings reports from our largest corporations. I say, “so what?” After all, our largest compannies aren’t American. Not only that, but employment numbers are still not even break even, although the “official” percentages continue to drop. I heard from many economists not too long ago that we’d need 350,000 new jobs every month for a decade to get back to a nominal level (say 6%). Not to mention that the states are scrambling to find money, foreclosures continue, home prices continue to sag, the construction business is completely dead. So, as the old Wendy’s ad said, “Where’s the beef?”

    And, official Washington is looking totally nuts in its debates over deficit reduction solutions. Grover Norquist has assured the nation that there will be no increase in taxation (including no reform the tax structure, egads!!). It would only take some major event to trigger a full blown depression. Maybe S&P is worried that the global economy along with our government’s economic stategies are enemic at best, and, unless quantitative easing works better than it has thusfar (so far it’s mostly assured Wall Streets biggest banks of continuing bonuses and credit for those who can afford it), then I think we are still deep in the woods. Please explain to me why I am wrong.

  19. The interest difference between a credit rating of AAA and four levels below is 0.5%. Why does anybody even care?

  20. Herbert Wetherby

    @ Bayward: I agree about the look of Washington, they say “watch as we reduce the deficit by cutting the budget.” Then continue to promise to tow the line on spending with negative real rates. Combine that with China seasonally dumping dollars for commodies in a big way this year, and then an additional $1 trillion usd for the bank of Japan to try and save its self. And there is no wonder price inflation is going to hit hard in this country very soon. If Ben says no more QE, stocks dive, If Ben says more QE, commodies rise. Either way this economy is screwed, enless you have plenty of cash or a few commodies. And if you do, just keep it to yourself and start farming near natural water sources. (some preferably connected to the sea).

  21. The S&P rating was quite pre-planned to provide political cover for focusing on cutting third rail spending items – defense, entitlements. It introduced no new information.

    On Day 1, the thought was: “Gee, if even the S&P is going to come out and state the obvious, then maybe the risk that everyone has been talking about for 30 years really IS real.”

    On Day 2, everyone scratched their heads and thought, “Wow, if the government let the S&P issue that sort of rating warning, then the govt. MUST have had a reason for doing it – they needed to create a threat to justify doing some particularly unpleasant budgetary things.”

    Not that I disagree with greater budgetary discipline (and tax reforms, and trimming some of the benefits the Boomer’s voted to pay themselves by issuing debt to the next generation).

    Nonetheless, it’s all kabuki theater.

  22. There is a possibility that S&P considers the House of Representatives sufficiently unconcerned with the debt limit that they would not raise the debt limit even to fund the budget which the House just approved for this year.

    In that case, a change of outlook would be reasonable, because some interest payments might be delayed, and that could trigger a run on the dollar and on US debt.

  23. @StatsGuy: kabuki theatre is a great name for it.

    So what would you say to monetary reform that would get rid of our debt-based money system?

  24. Look, it is pretty clear what the S&P is doing here. They messed up on the Mortgage (CDO, MBS) debacle and now they are trying to save face by being “astute” in the US deficit/debt matter. They know that if we wake up one day and hear that the US cant find buyers for its bonds then they people will say “the ratings agencies missed it again”. Notice that they only “warned” but didn’t (or at least not yet) downgrade. So that is playing it safe. They don’t upset the powers that be with an actual downgrade but still get to say “we saw it coming” or “we told you so” when the s hits the fan. Interesting times these are ( Yoda) LOL.

  25. Bruce E. Woych
  26. Hello:

    What entity now owns Standard & Poors? Does McGraw Hill Publishing still own them or does Bloomberg now own them? Just curious for obvious reasons.

  27. Herbert Wetherby

    @ George: Perhaps the BIS or Bank of International Settlements persuades them. Although they were supposed to be financially indepentant by now. Don’t know what happened there.

  28. @George & Herbert: McGraw-Hill owns S&P. Don’t understand why there’s any confusion about this. We do have Google, after all.

  29. Simon Johnson: “It is commendable that S&P now wants to talk about the U.S. fiscal deficit – one wonders where they were, for example, during the debate about extending the Bush-era tax cuts at the end of last year.”

    Absolutely, but then we would also have to ask: Where were you when the bank regulators decided that even though the banks and the markets already took into consideration the credit ratings when setting their risk-premiums they had also take into consideration the same credit ratings when setting their capital requirements for banks?

  30. To Carla:

    So you really believe everything you read on GOOGLE?
    So who now owns GOOGLE and McGraw-Hill? So who is now confused?

  31. “Not that I disagree with greater budgetary discipline (and tax reforms, and trimming some of the benefits the Boomer’s voted to pay themselves by issuing debt to the next generation).”

    You have it completely bassackward about the Boomers, sorry.

    Not only were the Boomers (Gates is 55-6) the inventors of everything that you have access to because they also figured out how much labor needed to get paid an hour in order to “buy” the standard of living everyone developed as a “Class” – the educated “Class” of the 1970s!

    I can’t figure out what *belief*, what *faith*, what “ism” or “ist”, what the hell went on in that monkey brain + imagination of the Gen X hero and role model – why did Blackwater Prince take all that was given to him and his Gen X and regress to cheerful hedonistic killers ala European Dark Ages with laptops and lasers and remote controlled planes? Couldn’t think of anything else better to do than to monitor the heart rate of people you waterboard via an iPad?

    Like I keep saying, you don’t have the data with which to run the stats….

    @Carla – on one hand they keep saying that Social Security and Medicare (or whatever) is short on cash while on the other hand – what you said :-) – they found the next “bubble” to pop….or a pinada…?

  32. @George: Uhm, Google is a search engine. It is a way for people to find things. I actually went directly to McGraw-Hill because I know how to do that. I don’t “read” Google, but sometimes I read things I find using the Google search engine. All I meant was, it’s easy to find out who owns S&P….Geez, George.

  33. Bruce E. Woych

    http://finance.yahoo.com/q/mh?s=MHP+Major+Holders

    The McGraw-Hill Companies, Inc. (MHP)
    Major Direct Holders (Forms 3 & 4)
    Holder Shares Reported
    MCGRAW HAROLD III 1,999,391 Feb 22, 2011
    BAHASH ROBERT J 464,083 Feb 23, 2010
    VITTOR KENNETH M 141,805 Mar 30, 2011
    MURPHY DAVID L 95,540 Feb 22, 2011
    TESCHNER CHARLES L. JR. 48,068 Feb 22, 2011

    Top Institutional Holders
    Holder Shares % Out Value* Reported
    STATE STREET CORPORATION 13,232,769 4.31 481,805,119 Dec 31, 2010
    VANGUARD GROUP, INC. (THE) 12,363,031 4.03 450,137,958 Dec 31, 2010
    OPPENHEIMER FUNDS, INC. 11,518,025 3.76 419,371,290 Dec 31, 2010
    PRICE (T.ROWE) ASSOCIATES INC 10,784,199 3.52 392,652,685 Dec 31, 2010
    BlackRock Institutional Trust Company, N.A. 7,637,688 2.49 278,088,220 Dec 31, 2010
    Allianz Global Investors of America L.P. 7,170,001 2.34 237,040,233 Sep 30, 2010
    Capital World Investors 37,509,100 12.23 1,365,706,331 Dec 31, 2010
    ONTARIO TEACHERS’ PENSION PLAN BOARD 5,831,495 1.90 212,324,732 Dec 31, 2010
    FIDUCIARY MANAGEMENT, INC. 5,517,034 1.80 200,875,207 Dec 31, 2010
    NORTHERN TRUST CORPORATION 4,378,391 1.43 159,417,216 Dec 31, 2010

    Top Mutual Fund Holders
    Holder Shares % Out Value* Reported
    WASHINGTON MUTUAL INVESTORS FUND 12,919,100 4.21 470,384,431 Dec 31, 2010
    INCOME FUND OF AMERICA INC 12,090,000 3.94 440,196,900 Dec 31, 2010
    AMERICAN BALANCED FUND 8,000,000 2.61 291,280,000 Dec 31, 2010
    PRICE (T.ROWE) EQUITY INCOME FUND 5,521,900 1.80 217,562,860 Mar 31, 2011
    DODGE & COX STOCK FUND 4,800,000 1.57 189,120,000 Mar 31, 2011
    OPPENHEIMER MAIN STREET FUND 3,474,774 1.13 119,844,955 Nov 30, 2010
    VANGUARD TOTAL STOCK MARKET INDEX FUND 3,264,119 1.06 118,846,572 Dec 31, 2010
    FMI LARGE CAP FD 3,245,000 1.06 127,853,000 Mar 31, 2011
    VANGUARD 500 INDEX FUND 2,748,597 0.90 100,076,416 Dec 31, 2010
    FUNDAMENTAL INVESTORS INC

    Sorry the indexed columns did not line up as posted, but the original link will lead you to a clear list of the “owners” of McGraw Hill and you can decide who might sit on boards such as BlackRock and Capital among other heavy hitters.

    This ain’t Kansas anymore,…and McGraw-Hill ain’t no book club…but tracking as to who might benefit from market sway and political pumping…well …

    try here: (my personal favorite)
    http://www.bloomberg.com/news/2011-04-20/geithner-downgrades-his-own-credibility-to-junk-jonathan-weil.html?cmpid=yhoo

    Geithner Downgrades His Credibility to Junk: Jonathan Weil
    By Jonathan Weil – Apr 20, 2011 7:00 PM ET

    TA TA…..

  34. Bruce E. Woych

    Or perhaps the Political synthesis mixed with the ambiguous underlying methodological objectivity of pure analysis??? (The intense nature of this article reads like two different positions…and can’t make up its mind which is dominant…you be the judge…). It is interesting, however, that a careful reading will leave you wondering just how much Obama actually “knew” about this report if he was able to ask them to hold it until after his speech…Hmmmmm? (see:about half way into the page)

    http://www.reuters.com/article/2011/04/21/us-usa-ratings-idUSTRE73K03220110421?feedType=RSS&feedName=PersonalFinance&rpc=43

  35. Bruce E. Woych

    And if “moving the goal post all around the field” is your favorite Lock Down position on reality…well…
    Seek out an authoritative inquisitor to read out an authoritative pundit…

    Charlie Rose Talks to S&P’s David Beers
    Standard & Poor’s startled world markets this week by lowering its outlook on U.S. debt to “negative.” Its sovereign-ratings chief defends the move

    By Charlie Rose

    http://www.businessweek.com/magazine/content/11_18/b4226050994254.htm?campaign_id=yhoo

  36. Bruce E. Woych

    GEEZE:StatsGuy:

    I never see too much deep speculative analysis anymore, but isn’t it of anyone’s interest to note if there were any major patterned hedge funds or other institutional programs systematically shorting the market in conjunction with this ratings release. It seems to me that if Obama Knew about this ratings and asked that it be held back, then there is a good chance that half or more of the Republican Party also knew…and if half of them knew,…well then half of the population of the Cayman Islands also knew…and so on and so forth…

    You don’t have to respond but I thought it might catch your interest and (…let us know…we won’t tell anybody…promise! )

    The University without Borders….(or Orders…)

  37. @Bruce – sadly, I have no idea, but it’s painfully obvious that information does leak.

    @Carla – I don’t think it’s possible to get fully rid of the debt based monetary system unless it’s done on a global basis, and the temptation to defect is too overwhelming, particularly if one country knows it’s systemically important and will get a currency rescue. However, I’ve complained at length about the current obsession with credit instead of cash, and the pro-cyclicality of endogenous money. Many economists, however, believe endogenous money (e.g. credit based monetary systems) give them more – not less – control over the money supply/velocity. I personally think they like endogenous money because when they choose to expand the money supply, they don’t need to do it through govt. spending.

    No one in the power elite gives much thought at all to the distributional implications of how money enters/leaves the system.

  38. Why is anyone paying attention to these credit rating agencies? They were complicit in the financial debacle of 2008.

  39. Bruce E. Woych

    tippygolden: (I was hoping for a “ditty”)

    One thing I learned observing Wall Street media culture is that there are 2 forms of information.

    1) Noise

    Noise is essentially designated as any flow of narrative, innuendo, opinion, inference, or rumor that suggests the direction of activity or events in the happening. It might be compared to the current (snooze) NEWS category being designated “factoid”

    2) Signal

    Signal is actual true fact (I don’t need to take it further than that)

    The signal to noise ration determines a good deal of true response in relationship to the emotive directives and herd driven reactions which are routinely manipulated in all directions (and the infamously unreliable caveat of …forward looking statements…).

    The reality of signal to noise is a phenomenon onto itself since, in a sense, it is a “history driver.”

    Political spin, slant outright deception and disinformation can be evaluated on the basis of a “signal to noise ratio” and its’ content and “intent” analyzed accordingly.

    People pay attention to these credit rating agencies for the same reason they pay attention to Cramer’s
    Street data on Wall street.

    1> signal: even if doesn’t have a single factual reality, the fact that it was released will have an impact that can be worked or managed according to how it will effect/affect your position.

    2> Noise: People are inherently gullible and appeals to authority are one fabulous way of working on their vulnerable suggestibility.

    Now Tippy…you owe me a “ditty!” (and make it “witty”)

  40. Stephen A. Boyko

    @ StatsGuy “endogenous money”

    Consider as substitute for “endogenous money” “transfer pricing (stock, oil, and gold bubble) and asset striping (NYSE sale to DB)

    @ tippygolden press “Why is anyone paying attention to these credit rating agencies”

    S&P is a good contrarian indicator and cover.

    Like Eastern-European oligarchs in emerging market countries needed the shadow economy of offshore and underground markets to facilitate their transactions, Geithner and Bernanke need the raising of the debt limit

  41. Bruce E. Woych

    One more illustrative point:

    If you imagine a radio dial and the frequency (which is more closely related to where “signal to noise ratio” derives from…);

    When you are tuning in your station you get a clear signal and the clearest signal on one precise spot (equivalent to “fact data” in our case).

    As you turn the dial too far from left or to right you get “NOISE” or static.

    Now that becomes more interesting when you use this analogy to assess the “news” or Political material being floated around…

    But it is equally interesting to note that “NOISE” can be used as a weapon (so to speak) to cloud the real truth or create disinformation over the center signal…or just plain confusion and chaos.

    Blatant terms that “load” the language with inference (calling something conspiracy is actually routinely done to obscure credibility or “color” of a signal in reality…say no more…); and rhetorical talking points are well structured NOISE factoids (typically generalizations can be made or “particularizing” the inference are just like tuning left and right to distort the signal in our illustrated model)

    I hope you find this useful; it has been a source of anchoring for me for a good many years.

    Happy Easter Everyone!

  42. Bruce E. Woych

    @ Per Kurowski: (Nice tie!)

    in viewing your (nice production!) video presentation it occurs to me that perhaps you see things from a very narrow and internalizing (Banking…not personally…but maybe a little of that too…). It seems that you are addressing very ‘Specific” cases of regulatory interference under very specific conditions. It is certainly true that when you place people in positions of power they will certainly adopt it and adapt it even if they don’t know how to properly use it. I think the question of regulatory ineptitude is different than “PRECLUDING” OR BLAMING”
    the very process itself. I also think it is a GROSS error to dismiss regulation and “regulatory agency” because you have seen instances of abuse or improper application.

    My puzzle with you is that you tend to ignore the history and context of the crisis itself and refuse to accept that the …BANKERS THEMSELVES… “ARE” …THE “RISK” that needs to be reigned in; and that deregulation has produced pure anarchy in self service against the public interest as well as potentially the very future and nature of society itself.
    How, on the other hand, can you complain about the regulators when there is an abundance of evidence to show that regulators were second class citizens and often crony affiliates after they did prove to have aptitude?

    Would you kindly review this basic summation of regulation and tell us where you agree or disagree with the basic tenets of rules and regulations in good governance or best practice? Because when most of us think of regulation we are thinking of both how regulations have been subverted and why we can’t get good legislation back to correct the obvious excesses that exist in TBTF and the economies of destruction!

    Please review:
    http://en.wikipedia.org/wiki/Regulation

    Thank you, and Happy Easter!

  43. Bruce E. Woych

    And of course the above most general categorization narrows down greatly when you bring it specifically into regulatory economics:

    http://en.wikipedia.org/wiki/Regulatory_economics

  44. Bruce E. Woych

    And finally, (since by extension this is where all the problems really exist in the current affairs of TBTF expansion and unfettered monopoly over finance…)

    please place this in the context of:

    http://en.wikipedia.org/wiki/Deregulation

    (we all know the “red tape” excuse…so please…be comprehensive in the context of current realism both globally and domestically.

  45. @Bruce E. Woych

    Thank you for the comment… and yes it is a nice tie. I have reviewed what you wanted and I have absolutely nothing against what is said there.

    I am not at all against regulations or a proponent of deregulation, what I oppose with all my heart is bad regulation. This is what we currently have when regulators ignored that the banks already consider the credit ratings when setting their risk-premiums and interest rates, and forced the banks to also consider exactly the same ratings with respect to how much capital they were required to have. And, as we know, something excessively considered can even be worse than something not considered at all.

    Also regulators are not there to control for the risks that are perceived by the bankers they are there to control primarily for the risks that might not be seen by the bankers.
    And with respect to history… please tell me when a financial crisis has derived from something perceived as risky… they have all derived from something perceived as not risky but that unfortunately was risky or became risky by overcrowding.

    And with respect to too big to fail it was the minimal capital requirements, like only 1.6 percent that served as growth hormones to the banks. And below what while being an Executive Director of the World Bank, I told the regulators when Basel II was discussed:

    “a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

    Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

  46. @Bruce E. Woych

    Yes it’s Easter. Here’s a passage from Mozart’s Requiem.

  47. Bruce E. Woych

    @ Per Kurowski (Amen to that!)

    I 100% agree on the progressive tax on size…,
    but that is a hot button issue right at the center of deregulation and laissez faire exceptionalism.

  48. Bruce E. Woych

    Thanks so much / …And One back to You tippygolden:

  49. Bruce E. Woych

    If I just print the link it will repeat the above screen that is inaccessible.

    Trust me…this version is worth it! you will have to place the segment (below…”feature=related”) onto the end of the one on top to get the full link.

    feature=related

  50. Bruce E. Woych

    OK…

    Do not press the arrow!

    click on the title at the top only and it will go through properly…

    wheeeewww!

    Hallelujah!

  51. @Bruce E. Woych “(Amen to that!) I 100% agree on the progressive tax on size…, but that is a hot button issue right at the center of deregulation and laissez faire exceptionalism”

    Yes but that is mostly so because you go after all bankers instead of some bankers… and instead of some regulators.

  52. Bruce E. Woych

    http://www.nytimes.com/2011/04/19/opinion/19nocera.html?_r=1

    Op-Ed Columnist
    Letting the Banks Off the Hook
    By JOE NOCERA
    Published: April 18, 2011

    “Judging by last week’s performance, it sure looks as though the country’s top bank regulator is back to its old tricks.
    Though, to be honest, calling the Office of the Comptroller of the Currency a “regulator” is almost laughable. The Environmental Protection Agency is a regulator. The O.C.C. is a coddler, a protector, an outright enabler of the institutions it oversees”

    separating the yolk from the scrambled egg is a good trick…lets just have real accountability …and some credibility across the board. Unless people are willing to name names…and expose games…we are all going around in circles!

  53. Herbert Wetherby

    @ Per: Ahh, may the golden screwdriver of life slip through your hands like hot oil on my dipstick. : > O

  54. “may the golden screwdriver of life slip through your hands like hot oil on my dipstick”

    Much to deep for me, I am just a country boy from Venezuela

  55. Herbert Wetherby

    Now I know where you made your wrong turn, Columbia.

  56. Robin Thomas

    The credit agencies are a joke. I just read “Griftopia” and I’m ready to burn Wall St. to the ground all over again. I can’t believe that we have allowed such scum to run and ruin our country.