# There's Nothing Sacrosanct About U.S. AAA Rating

#### doug reich

##### Some guy
Normally, I think this level of doom and gloom would signal the bottom, but that's not so clear.

What kind of falling-sky stories were there in 2000, 1998, 1987, 1981, 1973, etc.?

There's Nothing Sacrosanct About U.S. AAA Rating: Mark Gilbert
2008-07-16 23:01:00.0 (New York)

Commentary by Mark Gilbert
July 17 (Bloomberg) -- Over a plate of pasta on a January afternoon at Cecconi's restaurant in London, Pierre Naim outlined his plan to make money by betting that the U.S. government's financial reputation would crumble like Parmesan cheese.
Naim, who has owned the Nassau, Bahamas-based hedge fund Rainbow Advisory Services for more than a decade, was considering credit-default swaps. He didn't need the U.S. to default. If his peers shared his view on Uncle Sam's creditworthiness, the derivatives would jump in value.
The swaps had traded infrequently at less than 2 basis points, making for a very cheap bet. Naim put a $50 million trade on at 12 basis points -- I was a bit late,'' he says. This week, concern the U.S. is becoming addicted to financial bailouts drove the swaps to 18 basis points. Naim still isn't selling. Sensible, sane people are starting to question whether the U.S. can hang on to its AAA credit rating. The prospect of an extra$5 trillion or thereabouts leaking onto the U.S.
government's tab from Fannie Mae and Freddie Mac has spooked investors. As the man almost said, a trillion here and a trillion there, and pretty soon you are talking about real money.
Where does the government stop?'' asked economist Dennis Gartman in his Gartman Letter research report this week. Shall all farmers be bailed out? Shall General Motors and Ford, who are seemingly heading toward oblivion, be bailed out? Where does this mission creep end and how much shall it cost, and how badly shall the dollar be battered in the process?''

Too Chinese to Fail

Fannie and Freddie shares have declined by about 80 percent this year. The slump in the two mortgage agencies has sparked a new catchphrase -- Too Chinese to Fail'' -- based on the $974 billion of U.S. agency debt held by foreign investors, a fivefold increase since 2003. Financial markets and U.S. legislators alike have derided U.S. Treasury Secretary Henry Paulson's plan to bail out the mortgage lenders. One of the two key elements is illogical, while the second is plain outrageous. Just last week, Fannie Mae said it has access to ample sources of liquidity, including access to the debt markets.'' Freddie Mac said it was adequately capitalized, highly liquid and an essential part of the nation's housing system.'' Either they are being economical with the truth, or the decision to let them borrow from the Federal Reserve's discount facility is window-dressing that serves no real purpose. Defending the Indefensible Worse is the scheme to allow Paulson to dip into the nation's tax revenue to purchase shares in Fannie and Freddie -- shares that investors have already deemed to be almost worthless. If the mortgage lenders can't survive in their current form, the government shouldn't be defending the indefensible. In April, Standard & Poor's said the risk that the U.S. would have to prop up its so-called Government Sponsored Enterprises posed a bigger threat to the country's AAA rating than its willingness to underwrite securities firms. S&P estimated that even in a worst-case scenario, bailing out the broker-dealers would cost the U.S. less than 3 percent of gross domestic product, while Fannie, Freddie and Federal Home Loan Banks might drain as much as 10 percent of GDP. Defending the GSEs could create a material fiscal burden to the government that would lead to downward pressure on its rating,'' said John Chambers, chairman of S&P's sovereign rating committee. In Denial? Nikola Swann, S&P's primary U.S. credit analyst, said last week that the U.S.'s top grade isn't at risk. Steven Hess, a senior credit officer at Moody's Investors Service, also said that rescuing Fannie and Freddie doesn't trigger a downgrade. Well, they would say that, wouldn't they? Given the threat of increased regulation in their biggest market, the raters are unlikely to give the U.S. authorities even more reason to beat them up. There is an outside chance, however, that Fitch Ratings might be more willing than its peers to take the plunge. It has happened before. In 1998, Japan was wrestling with a belated plan to bail out its ailing financial industry, which was besieged by 77 trillion yen (then$579 billion) of problem loans and an economy in its third consecutive quarter of contraction.
Fitch was first to sanction the indignity of a rating cut, dropping Japan to AA+ in September. Moody's followed with a one- level reduction in November, while it took S&P until February
2001 to change its assessment.
Wherever you look in the world of finance, sacred cows are being slaughtered. Asia is exporting inflation instead of deflation. Governments are nationalizing companies -- the rail network in New Zealand, Northern Rock Plc in the U.K., Roskilde Bank A/S in Denmark, and IndyMac Bancorp Inc. in the U.S.
General Motors Corp. is suspending its dividend for the first time since 1922 and risks losing its berth in the Dow Jones Industrial Average after 83 years in the benchmark stock index.
One by one, the axioms of commerce are snapping.
There's nothing sacrosanct about the U.S.'s AAA rating, no matter what dogma and orthodoxy might suggest. Many financial assets that claimed AAA status before the credit crunch turned out to be irredeemably tarnished; there's a non-negligible risk that Treasuries will prove to be similarly spoiled.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)

As the man almost said, a trillion here and a trillion there, and pretty soon you are talking about real money.

The original saying, "A billion here and a billion there, and pretty soon you are talking about real money," has been ascribed to Everett Dirksen for donkey's years, but it appears he never said it. Those were the days (when a billion could actually buy something).

#### Saturnia

After all Russia defaulted in 1998. The point is that I hear too many people in the industry say that "the Fed should have a blue dollar plan" meaning in case things go wrong just issue a new ratio and the Chinese problem is "solved". The natural question arises that if that were to happen wouldn't US lose the economic leadership ? According to a lot of these people, "No", because US has the military power !!!

We all saw Russia with its might go down, and they had the military power too. When it comes to firing the weapons now a days its not the same as going to war with swords and ballistic instruments with fireballs instead of nuclear missiles.

Same thing with the Euro. The same people were "laughing" when the Euro came out. When it went above the dollar it was only temporary.... I wonder what they think now.

Hopefully things will be clear and clean up after election period.

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