Swift cuts on AIG signal wave of downgrades ahead

By Walden Siew - Analysis

NEW YORK (Reuters) - Credit rating agencies, criticized 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.

A week ago, Standard & Poor's warned that if insurance giant American International Group Inc (AIG.N) 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 Monday, S&P, Moody's Investors Service and Fitch Rating struck a triple blow to AIG's investment-grade rating and warned more downgrades could follow.

Hours later, the U.S. government had rescued AIG with an $85 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."

Credit market turmoil culminated this week in the government loan for AIG, once the world's largest insurer based on market value; the bankruptcy filing of Lehman Brothers Holdings IncLEH.N(LEHMQ.PK), spelling the demise of a 158-year-old trading company that was the parent of a major U.S. investment bank, and the hasty sale of Merrill Lynch MER.N, the largest U.S. retail brokerage whose advertising symbol is the bull, to Bank of America (BAC.N).

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

Late on Thursday, Moody's said it may downgrade ratings of bond insurers Ambac Assurance Corp (ABK.N) and MBIA Insurance Corp (MBI.N), due to increasing losses from subprime mortgage debt.

COSTLY GAME OF 'CATCH UP'

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 $1 trillion or more.

AIG insurance contracts on mortgage-linked derivatives, known as Collateralized Debt Obligations, of CDOs, have hit AIG with $18 billion in losses over the past three quarters.

"The rating companies missed the boat on AIG, and now they are playing 'catch up,'" said Edward Grebeck, chief executive officer of Tempus Advisors in Stamford, Connecticut.

Grebeck called AIG "the GE of the industry" and said its rating downgrade may lead to a fresh round of cuts for the sector and related bonds.