First Time Ever: America Loses Its AAA

There is a downgrade this week, and the downgrade is the rating: the AAA of the United States, cut to AA+ on Friday evening, the first time in history that America lost its top mark. The downgrade is the shock, and the shock is the market: the Dow that fell 634 points, the worst day since 2008. The questions began that day: what is a rating worth, who can be trusted, where does the money go. The First Time Ever is the August 2011 story, and the story is the lesson: the rating that fell on Friday, the market that reeled on Monday, the trust that must be rebuilt.

First Time Ever is the subject of this article: what Standard & Poor's did on Friday, how the market answered on Monday, why the AAA mattered, what the AA+ means.

1. The Downgrade on Friday

The downgrade is the news, and the news is the Friday: the fifth of August, the evening announcement from Standard & Poor's, the rating of the United States cut from AAA to AA+. The downgrade is the first: the first time in history that America has lost its top credit rating, the AAA that had stood for generations, the mark that no one believed could fall. The downgrade is the reason: the political brinksmanship over the debt ceiling, the risk that the debt trajectory would not be stabilized, the words in the statement, the explanation that landed like a verdict.

The downgrade is the timing, and the timing is the week: three days after the debt ceiling deal, the deal that raised the ceiling with spending cuts, the deal that S&P said was not enough. The downgrade is the warning: the months of standoff in Congress, the near default drama, the brinksmanship that the agency named out loud, the Tea Party and the White House locked in a fight that would not end. The downgrade on Friday was the judgment, and the judgment was the point: the rating that protected the American government for generations, cut in a single evening.

2. The Standoff

The standoff is the context, and the context is the spring: the months of debt ceiling debate in Congress, the deadline that approached, the two sides that would not move. The standoff is the fight: the Tea Party against the White House, the spending cuts demanded, the default threatened, the drama that played out in public for all to see. The standoff is the brink: the government that came within days of running out of room to borrow, the world that watched, the rating agencies that warned, the deadline that finally forced a deal, the standoff that consumed the capital.

The standoff is the cause, and the cause is the rating: the brinksmanship that the agency cited, the political risk that the agency said it could no longer ignore, the debt trajectory that would not be stabilized. The standoff is the price: the confidence that was spent, the trust that was worn thin, the image of the world's most reliable borrower negotiating with itself. The standoff was the prelude, and the prelude was the warning: the fight that did not end with the deal, the judgment that came three days later, the AAA that fell because Washington could not govern quietly.

3. The Deal on Tuesday

The deal is the Tuesday, and the Tuesday is the second: the second of August, the agreement that raised the debt ceiling, the spending cuts that came with it, the crisis that was supposed to be over. The deal is the relief: the default that was avoided, the government that kept borrowing, the markets that breathed again, the calm that lasted three days. The deal is the judgment: the agreement that Standard & Poor's weighed and found wanting, the cuts that were not enough, the trajectory that would not be stabilized, the verdict that followed three days later on Friday.

The deal is the question, and the question is the math: the ceiling that was raised, the cuts that were promised, the deficit that remained, the numbers that Standard & Poor's ran and did not like, the debt that grew. The deal is the disappointment: the compromise that satisfied no one, the Tea Party that wanted more, the White House that wanted less, the agency that wanted certainty. The deal on Tuesday was the last chance, and the last chance was the test: the agreement that the agency judged, the test that was failed, the downgrade that came three days later.

4. The Rating

The rating is the promise, and the promise is the AAA: the top mark of creditworthiness, the grade that meant the United States would always pay, the label that the world's risk free asset wore for generations. The rating is the history: the mark that had been untouchable, the AAA that Moody's had held since 1917, the grade that Standard & Poor's had carried since 1941, the constant in every calculation. The rating is the trust: the bond that every fund owned, the benchmark that every price referenced, the foundation that no one questioned, the certainty that every calculation assumed.

The rating is the symbol, and the symbol is the state: the United States as the safest borrower on Earth, the Treasury bill as the place where money goes when fear strikes, the credit the whole world leaned on. The rating is the crack: the first crack in the world's risk free asset, the AA+ that replaced the AAA, the step down that changed the meaning of a century of certainty. The rating was the floor, and the floor was the point: the grade that fell on Friday, the floor that gave way, the world that must now recalculate everything.

5. The Monday

The Monday is the answer, and the answer is the market: the eighth of August, the first trading day after the downgrade, the Dow that fell 634 points, the 5.6 percent drop, the worst day since 2008. The Monday is the scale: the S&P 500 down about 6.7 percent, the trillions in market value erased, the red that covered every screen, the selling that did not stop, the value that vanished in a single session. The Monday is the confirmation: the fear that the rating could not contain, the panic that the AA+ released, the day that the downgrade became real.

The Monday is the volume, and the volume is the machinery: the enormous trading that filled the day, the high frequency systems that amplified the selloff, the debate that returned about the flash crash machinery, the machines that had been blamed since May 2010. The Monday is the speed: the orders that fired in milliseconds, the quotes that changed in microseconds, the cascades that fed themselves, the market that moved faster than any human could follow. The Monday was the storm, and the storm was the point: the selling that the machines made worse, the day that every investor will remember.

6. The Paradox

The paradox is the market, and the market is the gold: the gold that soared, the metal that investors bought when trust failed, the metal that no government can print, the old refuge that gleamed while stocks burned. The paradox is the Treasury: the bonds of the very government that had just been downgraded, the Treasuries that oddly rallied, the money that fled stocks and landed in the safest corner it could find. The paradox is the flight: the flight to safety that defied the rating, the paradox that the press reported all week, the puzzle no one could fully explain.

The paradox is the lesson, and the lesson is the fear: the investors who did not care what the rating said, the investors who only cared where the money would be safe, the world that still trusted American bonds more than anything else. The paradox is the question: if the downgrade changed nothing for Treasuries, what did it change, what was the AAA worth, what is the AA+ worth. The paradox was the week, and the week was the confusion: the gold that rose, the bonds that held, the stocks that fell, the signal that no one could read cleanly.

7. The Machines

The machines are the traders, and the traders are the algorithms: the high frequency systems that dominated the tape, the computers that decided in milliseconds, the market that was no longer human. The machines are the amplifier: the selloff that they fed, the volume that they created, the enormous tape of August 8, the orders that came faster than any human decision, the cascade that the machines made worse. The machines are the debate: the flash crash machinery question, the May 2010 plunge that was still unexplained, the worry that the machines had outrun the regulators, the question that would not go away.

The machines are the speed, and the speed is the story: the orders that fired faster than news, the quotes that changed in microseconds, the Dow that fell 634 points in a single session of machine driven selling. The machines are the technology: the technology story inside the ratings story, the trading that amplified the downgrade, the systems that turned a rating cut into a rout. The machines were the channel, and the channel was the point: the panic that traveled at machine speed, the market that reacted before anyone could think, the technology that made Monday what it was.

8. The Lesson

The lesson is the first, and the first is the crack: the first time in history that America lost its AAA, the crack in the world's risk free asset, the certainty that will not return. The lesson is the politics: the brinksmanship that caused the downgrade, the government that could not agree, the rating that fell because Washington fought in public, the fight that the rating agency finally priced in. The lesson is the trust: the trust that the rating represented, the trust that the standoff spent, the trust that must be rebuilt with every payment, every budget, every year.

The lesson is the August 2011 story, and the story is the lesson: the downgrade on Friday, the deal on Tuesday, the Monday that followed, the gold that soared, the bonds that held, the machines that amplified, the AAA that fell for the first time. The lesson is the change: the world that must now price American risk for itself, the benchmark that is no longer absolute, the question every investor carries. The First Time Ever is the beginning, and the beginning is the year: the rating that fell, the trust that must be earned again, the lesson the world will carry.

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