Common Cents for August 3, 2012

August 6, 2012, by John Norris

Around this time last year, the markets were struggling with the potential downgrade of US Treasury debt. Investors were wringing their hands and gnashing their teeth about the potential ramifications. Just what would happen if the ratings organizations took the Treasury from AAA down to AA+? The general consensus, as fueled by the broadcast media, was it couldn’t be good.

Those of us who have been in this industry long enough know a downgrade of that, um, magnitude is the financial equivalent of a heaping helping of “so what.” I am not trying to be cavalier, but borrowing costs for a solid AA+ credit aren’t through the roof. In fact, investors and bankers line up around the block to lend money to such credits. AA+? Would that all borrowers would have such a high credit rating. To put it in layman’s terms, I would equate this type of rating to a personal credit score (FICO) of around 800.

Are borrowing costs significantly higher for someone with an 800, as compared to someone with an 825 or so? Not especially, if really at all, and I said as much to anyone who would listen last year. In fact, I even went as far as saying the impending downgrade would be analogous to the Y2K imbroglio. Yeah, everyone got into a lather about it, but, when the dust settled, so what? The world didn’t end, did it? Of course not.

So, perhaps I was a little too sanguine about the situation, as I head off to the annual ‘extended family’ beach trip. S&P and Moody’s would state the obvious, and we would all go on with our lives. Again, it would be a fizzle, or so I thought.

That first weekend, well after trading on Friday night, the shoe fell, and S&P did what we all knew it was going to do. My male in laws questioned me about the endgame, and I told them pretty much what I have already written. In fact, I was happy the inevitable was finally behind us, and I expected no real detrimental outcome from it all. You might remember what happened next.

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