Swift AIG cuts hint at more 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.

On Friday, September 12, 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 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 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 changed the face of Wall Street last week with 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).

Over the weekend, the Bush administration proposed a $700 billion fund to buy distressed mortgage debt and related instruments from banks as the country tries to stanch the worst financial storm since the Great Depression. U.S. Treasury Secretary Henry Paulson made his case for the unprecedented bailout, as the administration and congressional leaders debated details. No agreement is expected before the end of the week.

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, September 18, 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, or 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.