A Modest Proposal On Ratings Agencies

If you were considering lending money to a friend of mine and were asking me for some advice and I thought there was an 95 percent chance that the friend in question would pay you back, I would say, “I’d say there’s about an 95 percent chance he’ll pay you back.” Something like that. What I definitely wouldn’t do is say, “oh, yeah, my friend’s got an AA+ rating.” And if my friend did something new to make me think the odds might be more like 90 percent, I’d say, “he just did this thing that makes me think the odds are more like 90 percent.” Similarly, if I realized that I’d neglected something earlier, I’d say, “sorry, man, I screwed up — odds are more like 90 percent.” But, again, what I definitely wouldn’t do is say “he’s downgraded from AA+ to AA.”

The reason, of course, is that you don’t convey information about probabilities via arbitrary alphanumeric strings. You use arbitrary alphanumeric strings because you’re trying to be deliberately vague about what you’re saying in order to evade accountability.

Something you think about as you ponder Fitch’s downgrade of New Jersey’s bonds from AA to AA-. What does that mean? What’s the difference between America’s former AAA status in the eyes of S&P and our current AA+ status?