The ratings agencies may have been totally off the mark ahead of the mortgage crisis that helped to wreck our economy, but do not think for a second that they are not still a force that can move markets. The downstream effects of the official CreditWatch Negative outlook from Standard & Poor’s is making waves all the way down the financial chain.

The logic is rather simple.  If your portfolio holdings are heavily weighted in “AAA” quality debt instruments and the whole asset class is close to being downgraded, guess what happens with your own rating when you are dependent on all those credit instruments being there in the future.  Oh, and take a guess what happens when you think you are fine on your own but all of your counterparties are suddenly under question.

The title of the report is only the start of it.  In “United States of America ‘AAA/A-1+’ Ratings Placed On CreditWatch Negative On Rising Risk Of Policy Stalemate,” the fallout trickles downward.  The move was to go on to CreditWatch with negative implications.  The vicious cycle has already started and the political mayhem in Washington D.C. is literally within striking distance now.  If you want to know just some of S&P’s aftermath, the ‘negative outlook’ has moved to the following:

• ‘AAA’ Ratings On U.S. Insurance Groups placed on CreditWatch Negative following Sovereign CreditWatch placement
• ‘AAA’ Ratings On Three U.S. Clearinghouses, One CSD, and Select Government Sponsored Entities On Watch Negative after sovereign action
• Navy Exchange Service Command ‘AA/A-1+’ ratings placed on CreditWatch Negative
• Marine Corps Community Services ‘AA/A-1+’ Corporate Credit Rating placed on CreditWatch Negative
• Army & Air Force Exchange Service ‘AA/A-1+’ Ratings placed on CreditWatch Negative

Here are just some of the subgroups on Credit Watch negative:

• 125 FDIC-guaranteed ‘AAA’ rated debt obligations issued by 30 financial institutions under the TLGP
• eight federal leases and certain power-generation entities linked to the federal government
• 73 of the 206 rated funds managed in the U.S., Europe, and Bermuda
• 604 U.S. structured finance transactions with an original issuance amount of $373.67 billion, supposedly less than 3% of the structured finance transactions rated globally

As far as the clearinghouses:

• the Depository Trust Co.,
• the Fixed Income Clearing Corp.,
• the National Securities Clearing Corp.,
• the Options Clearing Corp.

By the way, take a guess about what happens to the ratings of all the banks in America if or when a real downgrade hits… They are large holders of government and GSE debt, and that is an understatement.

Washington D.C. is assuring that the United States is on the verge of ending up with close to the same credibility as the nations called the PIIGS.  The key financial difference between us and them is rather simple: we own and still have the right to use the printing presses that can print money.

I do not know which fund manager was the first to vocalize this phrase, but it is more appropriate than ever as a reminder: “a Triple-A rating is a lot like virginity, very easy to lose and very difficult to get back.”

JON C. OGG

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