U.S. loses AAA credit rating, downgraded from S&P

August 6th, 2011, 11:54 AM

I would still like to know --- those securities which are mandated to be in AAA-rated holdings, how is this calculated? Can the issuer just pick one of the three agencies and say, welp, S&P is at AA so we have to sell everything and move it to a different security? Or can they say, welp, Fitch and Moody's are at AAA so we'll just keep it here even though S&P says it's AA?

Is it an average or a majority? Or can they just decide who to look at and who to ignore?

Mike

August 6th, 2011, 12:12 PM

Funny, I was thinking the same thing... It wouldn't surprise me if they suddenly announced a "gross miscalculation" and changed the rating back. But as they went to the step of actually proceeding with the downgrade, I would hope they have the backbone to defend their decision...

As for the good of the minority vs the majority, it will be interesting to see how extensive the civil unrest will become (if it comes to that)...

One thing's for certain, there are huge difficulties ahead. And no one wants to take the steps required to contain the problem...

August 6th, 2011, 12:12 PM

Quoting

Marc Pado, Cantor Fitzgerald market strategist, said it may be that stocks will take the news better than some might expect because the market has been reacting to the potential downgrade by one or more notches for the past two weeks.

"Asia's going to open first, and Europe second. There might be more angst in trading there before our markets open. But after the first hour, I think we'll shake it off," he said. "If they were going to take it down more than one notch, we would have a bigger reaction of three to five percent in the market."

Link

August 6th, 2011, 12:15 PM

Big Mike

I would still like to know --- those securities which are mandated to be in AAA-rated holdings, how is this calculated? Can the issuer just pick one of the three agencies and say, welp, S&P is at AA so we have to sell everything and move it to a different security? Or can they say, welp, Fitch and Moody's are at AAA so we'll just keep it here even though S&P says it's AA?

Is it an average or a majority? Or can they just decide who to look at and who to ignore?

Mike

I am also quite curious about that, I am not sure how it works in practice...

August 6th, 2011, 12:16 PM

Big Mike

I would still like to know --- those securities which are mandated to be in AAA-rated holdings, how is this calculated? Can the issuer just pick one of the three agencies and say, welp, S&P is at AA so we have to sell everything and move it to a different security? Or can they say, welp, Fitch and Moody's are at AAA so we'll just keep it here even though S&P says it's AA?

Is it an average or a majority? Or can they just decide who to look at and who to ignore?

Mike

Don't really know the answer myself but I did see an interview with Barney Frank (take it for what it's worth) and he said that "they" go with the highest rating out there. He pretty much says that it doesn't matter(that S&P downgrades) because the other agencies still have the higher rating. Wether this is the way it is or not remains to be seen for variuos reasons like that it was S&P that did the downgrade

Edit: Let me clarify, at the time of the interview Barney didn't mention any specific ratings agency...and my point is that since S&P is the big dog and what they say may have more weight in regards to nation ratings

August 6th, 2011, 12:16 PM

Lornz

But as they went to the step of actually proceeding with the downgrade, I would hope they have the backbone to defend their decision...

They did defend giving Lehmans an A rating 3 months before Lehmans declared bankruptcy.

Quoting

"In our view, Lehman had a strong franchise across its core investment banking, trading, and investment management business," S&P stated. "It had adequate liquidity relative to reasonably severe and foreseeable temporary stresses."

Link

August 6th, 2011, 12:27 PM

ron99

They did defend giving Lehmans an A rating 3 months before Lehmans declared bankruptcy.

Link

What? You disagree with their decision and reasoning?

Lehman is an interesting case, though. Their competitors wanted them gone, and this was a good opportunity. GS and HSBC apparently did the most damage... Some people made a lot of money that collapse and the aftermath...

August 6th, 2011, 02:11 PM

Big Mike

I would still like to know --- those securities which are mandated to be in AAA-rated holdings, how is this calculated? Can the issuer just pick one of the three agencies and say, welp, S&P is at AA so we have to sell everything and move it to a different security? Or can they say, welp, Fitch and Moody's are at AAA so we'll just keep it here even though S&P says it's AA?

Is it an average or a majority? Or can they just decide who to look at and who to ignore?

Mike

From what I've seen, most institutions have the specific agencies listed within their investment policy statement and I've seen S&P listed in quite a few of them. But the changes won't happen overnight I'm guessing. This will most likely take a decision by the trustee's, board of directors, etc. to make the adjustments. But given this has never happened before, we could see a knee-jerk reaction.

Also, from what I've read, the Fed has not changed it's capital requirements for banks because of this downgrade. This tells me that we could see some serious problems as the Fed inherently does the wrong thing in most cases. Additionally, we need to see what other countries do now that this has happened. They could easily ignore the Fed and change their capital requirements and cause a tail spin. In fact, that is what I expect to see as the playing field just got a little more level.

August 6th, 2011, 04:49 PM

I think you guys are missing the wood for the trees.

The short term implications, such as what bond funds required to hold AAA paper will do, is done and dusted. For too long has the possibility of a downgrade been on the table for long enough for institutions and regulators to either prepare for adapting / exempting AAA mandates. And, in all honestly, it isn't the bond funds that are the immediate problem - it's the money market funds that pose the nearest threat. Still, come Monday morning I don't think the wheels are going to fall off the SP500 (if anything, corporates become more attractive), and the US bond market is the deepest in the world - all $700 trillion of it - and so, frankly, there isn't anywhere else to put your money anyway.

The importance of the downgrade is how it will be played out in the 2012 election; in their report, S&P make it plain that the deficit problems that are blossoming now were planted many years ago, and that the shambles of the past month has cemented the rating as confidence in bipartisan relationships has crumbled...

"The political brinksmanship of recent months highlights what we see as
America's governance and policymaking becoming less stable, less effective,
and less predictable than what we previously believed. The statutory debt
ceiling and the threat of default have become political bargaining chips in
the debate over fiscal policy."

I posted the actual report in the elite section, but so far no-one seems to give a shit what S&P actually say, just make guesses on where the spoos will open...

August 6th, 2011, 05:25 PM

cpi65

I think you guys are missing the wood for the trees.

The short term implications, such as what bond funds required to hold AAA paper will do, is done and dusted. For too long has the possibility of a downgrade been on the table for long enough for institutions and regulators to either prepare for adapting / exempting AAA mandates. And, in all honestly, it isn't the bond funds that are the immediate problem - it's the money market funds that pose the nearest threat. Still, come Monday morning I don't think the wheels are going to fall off the SP500 (if anything, corporates become more attractive), and the US bond market is the deepest in the world - all $700 trillion of it - and so, frankly, there isn't anywhere else to put your money anyway.

The importance of the downgrade is how it will be played out in the 2012 election; in their report, S&P make it plain that the deficit problems that are blossoming now were planted many years ago, and that the shambles of the past month has cemented the rating as confidence in bipartisan relationships has crumbled...

"The political brinksmanship of recent months highlights what we see as
America's governance and policymaking becoming less stable, less effective,
and less predictable than what we previously believed. The statutory debt
ceiling and the threat of default have become political bargaining chips in
the debate over fiscal policy."

I posted the actual report in the elite section, but so far no-one seems to give a shit what S&P actually say, just make guesses on where the spoos will open...

I would agree with your thoughts on money market funds. There is the potential for a breaking of the buck. But Bond Funds are only a slice of the US treasury ownership pie that this downgrade affects. There are huge pension funds, endowment funds, sovereign funds, bank holdings for collateral that has potentially created an adverse/material event that can have a knee-jerk scramble to rebalance their positions to other AAA rated securities. As mentioned before, the question is which agencies will these institutions lean more on? From being in the investment management business my entire career, I can assure you that I've seen a majority of these entities place a high emphasis on the S&P's ratings. That is why this is huge.

I think everyone cares about what the S&P has to say. Doesn't mean everyone needs to comment on it though. As for what the market opens at, who cares. Just trade what you see on your screen...

U.S. loses AAA credit rating, downgraded from S&P

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U.S. loses AAA credit rating, downgraded from S&P