The One Press Release That The S&P Will Never Issue

It took less than 48 hours for the market to completely shrug off S&P's warning about America's credit rating, even as the dollar: that prima facie indicator of US stability and viability, has just hit a fresh 16 month low. And while nothing anyone says has much of a chance to impact the market, which continues to move with a negative 1 correlation to the now default carry funding currency, the following is the press release that S&P should issue if it wants to truly bring attention to the US debt crisis.

NEW YORK (Standard & Poor's) April 22, 2011--Standard & Poor's Ratings Services said today that it initiated ratings on the debt issues of the Federal Reserve System (commonly referred to as U.S. dollars) with a AAA/Negative Outlook.

We derive our opinion from the observation that the Federal Reserve’s assets consist of roughly $2.5 trillion of government debt with a deteriorating outlook against $52 billion in capital, thus yielding a leverage ratio of 48x.

In addition to its highly leveraged exposure to a deteriorating credit (the United States of America), the Federal Reserve’s stated strategy is to sell these securities back into the market (as a means of tightening policy).  In the event of future downgrades of the U.S., these securities are likely to generate losses in multiples of existing capital. 

The Federal Reserve intends to handle said losses via a ‘negative liability’ account, which makes them the liability of the United States of America.  This creates a very clear event horizon, or point of no return: downgrades of U.S. government debt generate substantial losses on Federal Reserve’s balance sheet, which then make the U.S. government’s debt larger than it was before the downgrade, thus creating a vortex of deteriorating credit.

If we were to lower the ratings on the U.S., we would also lower the ratings on the debt of the Federal Reserve, as well as our issuer credit ratings on all other individual GRE entities.

From John Lohman