Just when you thought the debt ceiling crisis couldn’t get any uglier, Standard & Poor’s has, as you all well know, downgraded the sovereign creditworthiness of the United States on the rationale that its political infighting is seen as an excessive risk, given the country’s debt load. That’s a decent point to make in an editorial, one supposes. It seems like weak sauce for downgrading the single largest economy in the world, however, one that is still several time the size of China’s, and that has not actually missed a payment yet. To downgrade the U.S. over the political fracas that ensued last month over the debt ceiling (something President Reagan raised 16 times during his administration, by the way, without much fuss) is akin to getting your credit card canceled because Amex heard you had an argument with your spouse.
Frankly, the entire thing displays that like the NAIC, rating agencies wield a power outsized to their public accountability. They are beholden to no government agency, for they are not one. They are private companies, not always running the best data, that are entirely profit-motivated, and not always staffed with the smartest people. These are the folks Wall Street is taking its cues from? We may be in more trouble than we think, people.
Following the news that a number of top life insurers were similarly downgraded yesterday, apparently for their investment in treasuries, all I can conclude is that this entire episode raises more questions about the methodologies of rating agencies than anything else. The financial stability of the life insurance industry is always a fair thing to question. But in the case of companies such as the Knights of Columbus, TIAA, USAA and New York Life, which have all been downgraded, I must wonder how something like this could have come to pass. Either the industry is deeply out of whack, or the people rating it are.
I began my career at the A.M. Best Company.And while I cannot divulge the operational details of how Best rated companies, I can tell you that personally, I don’t think its ratings merit the level of confidence that people outside of the company place upon it. This is a speculative statement, to be sure. But if you doubt me, talk to any ex-employee of A.M. Best and ask them about how things run there. It should not be hard; there are a lot of ex-A.M. Besters. (Leader’s Edge magazine ran a pretty damning cover story in October 2006 about Arthur Snyder, Jr., then the president of Best. Sadly, the Leader’s Edge archive only goes back to 2007, but read the article if you can find it.)