Yet today, members of the same bond family are, according to S&P, more trustworthy than Treasuries? Financial experts say this contrast illustrates a major problem with credit ratings agencies.
One top financial executive cautioned against assuming the Springleaf bonds are a poor investment -- "it's all in the specifics" -- but also noted that the disparate ratings proves ratings are of questionable use to investors.
"Anyone who believes that there's perfect internal consistencies across all different asset classes and within asset classes ... that person should not be investing large amounts of money," the source said. "It raises the question of whether we're ever going to move away from these credit ratings agencies."
This is a lesson big investors have taken to heart.
"Everybody has been led to believe over the years that AAA means AAA means AAA across the board," Gregory W. Smith, the general counsel for the Public Employees' Retirement Association of Colorado, told Bloomberg. "Anybody that didn't learn in the 2008 crisis that doesn't apply should find another line of work."
"I'm trying to sort out why debt backed by the ability to tax in the United States is rated lower than securities that are backed by no particular ability to have additional revenue," John Milne, CEO of JKMilne Asset Management also told Bloomberg.
An S&P spokesman notes that the U.S. downgrade isn't incompatible with state, municipal, and even riskier finance bonds maintaining their AAA status. "[A] sovereign rating does not act as a cap on the ratings of issuers or issues domiciled within the sovereign or backed by assets sourced from within the sovereign. That applies to ratings on structured finance instruments as much as to corporate, municipal, and other credits."
The firm weathered serious criticism after it downgraded U.S. debt, particularly for basing its initial decision to lower the rating on a significant miscalculation of the country's projected debt. When the Treasury Department informed the firm of that error, they revised their justification for the downgrade, and did it anyway. Moody's chief economist Mark Zandi declined to comment for this article, but passed along his critique of that episode.
"S&P incorrectly projected the nation's debt-to-GDP ratio a decade from now at 93% instead of a more appropriate 85%," Zandi wrote. "This is a substantial difference, though it didn't change S&P's decision."
Partly for that reason, Treasuries didn't suffer as a result of the downgrade. In fact they rallied -- increased investor demand drove the yield on 10-year Treasury notes down below 2 percent in August, nearly two percentage points below yields for the highest rated mortgage backed securities.
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