Swift AIG cuts hint at more downgrades ahead

Credit rating agencies, criticised for moving too slowly in cutting ratings on Wall Street firms and the complex instruments they devised, are now accused of acting too quickly.

As the credit crisis enters a new phase, the pendulum has swung too far back, critics argue. The agencies are still missing the mark, only now they are too aggressive, adding to market volatility, or changing their views within days or weeks. Case in point: AIG.

On Friday, September 12, Standard & Poor's warned that if insurance giant American International Group Inc. didn't demonstrate adequate access to capital in the short term, the rating company could cut its ratings by as much as three notches.

Late on the following Monday, S&P, Moody's Investors Service and Fitch Rating had struck a triple blow to AIG's investment-grade rating and warned more downgrades could follow.

Within 24 hours, the US government had rescued AIG with an €58 billion loan, and the rating companies scrambled once again to revise their outlooks.

"AIG was a signal they are being more aggressive in today's environment," said Joseph Mason, a finance professor at Louisiana State University. "They've had their backs against the wall, and they are being forced to cut."

In contrast to the rapid rating downgrades of AIG and structured finance securities linked to troubled mortgages, the rating agencies were criticised early this year for taking too long to cut the ratings of the bond insurers.

AIG's problems come amid widespread destruction of capital on Wall Street that has crippled credit markets. Various estimates say global losses may climb to €689 billion or more.

AIG insurance contracts on mortgage-linked derivatives, known as Collateralised Debt Obligations, or CDOs, have hit AIG with €12.3 billion in losses over the past three quarters.

Rating companies already are signaling that more cuts are coming for corporate bonds and complex debt. Moody's noted that it is updating its loss projections for subprime residential mortgage-backed securities and even jumbo and prime mortgage-backed securities. On Thursday, S&P cut ratings on various leveraged debt of CDOs.

"AIG is a signal and historic event without precedent," said John Chambers, managing director and chairman of S&P's sovereign ratings committee. "This is of greater magnitude" than the US savings and loan crisis, the Nordic banking crisis and the Asian financial crisis, he said.