GE Loses AAA Credit Rating

The Madoff Rally, The GE Credit Relief Rally, The Accounting Rule Change Rally

While the downgrade of its credit rating, in and of itself, would generally be considered a demerit for a company such as GE, which lost its standing as one of just six non-financial companies with an AAA-rated debt, the downgrade wasn’t as severe as some GE watchers had feared - it was cut one notch to AA+, instead of the two- or three-notch decline that some investors braced for - and had been widely discounted in a stock that traded aat a 13-year low earlier this month on exactly those worries about a hit to its credit rating. And, for all intents and purposes, credit-rating agency calls these days have become regarded as lagging, not leading, indicators. S&P might have been about the only institution out there that regarded GE’s debt as triple-A quality as recently as Wednesday.

Why would anyone even care what the rating agencies think of GE's debt? These are the same rating agencies who assigned AAA ratings to subprime debt. The theory seemed to be that if toxic assets were properly bundled then they could be pressed into fine wine.

February 20, 2009
Mortgage "AAA" bond downgrades could double -Citi

In the subprime category, the Citi analysts, led by Rahul Parulekar, project downgrades for AAA bonds originated during the peak years of 2006 and 2007...

On AAA-rated "Alt-A" bonds, which are backed by mortgages short on proof of income and others most vulnerable to falling house prices...

Just imagine what Benjamin Franklin would say if he was still alive today. Actually, you might not need to imagine it.

I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things. - Benjamin Franklin

We live in an era of falseness. Of that I am fairly certain. Just look at that first headline. We're having a rally based on a ponzi schemer, a debt downgrade, and a potential accounting rule change that can make at least some of these toxic assets magically vanish.

Let's not stop there though. A more aggressive accounting rule change could turn these toxic assets back into the appearance of fine wine again. That could lead to an actual debt upgrade and even more ponzi schemers! Hurray!