Downgrade mania begins to hit the filings…

August 8, 2011

Another day, another crazy day for the markets, with the Dow down over 300 points this morning. As we footnoted on Friday, there was already some speculation in the filings about a downgrade. And as the WSJ reported here, the rumors that S&P would downgrade the United State’s debt rating were flying fast and furious on Friday, which issued its downgrade (pdf) late Friday.

As the WSJ also reported, finance, accounting and compliance folks at many companies spent the weekend combing through the fineprint to see how the downgrade would impact them.

And, this morning, we’re already starting to see the results of some of that weekend work.

Take the 10-Q that Morgan Stanley (MS) filed shortly after 8 am this morning, which added this new risk factor about the downgrade. Clearly, their compliance department didn’t spend the weekend in the Hamptons. Instead of a snip, we thought it was important enough to include the whole thing:

Concerns regarding downgrade of the U.S. credit rating and the sovereign debt crisis in Europe could have a material adverse effect on our business, financial condition and liquidity.


On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. While U.S. lawmakers reached agreement to raise the federal debt ceiling on August 2, 2011, the downgrade reflected Standard & Poor’s view that the fiscal consolidation plan within that agreement fell short of what would be necessary to stabilize the U.S. government’s medium term debt dynamics. This downgrade could have material adverse impacts on financial markets and economic conditions in the United States and throughout the world and, in turn, the market’s anticipation of these impacts could have a material adverse effect on our business, financial condition and liquidity. In particular, it could disrupt payment systems, money markets, long-term or short-term fixed income markets, foreign exchange markets, commodities markets and equity markets and adversely affect the cost and availability of funding and certain impacts, such as increased spreads in money market and other short term rates, have been experienced already as the market anticipated the downgrade. In addition, it could adversely affect our credit ratings, as well as those of our clients and/or counterparties and could require us to post additional collateral on loans collateralized by U.S. Treasury securities. Because of the unprecedented nature of negative credit rating actions with respect to U.S. government obligations, the ultimate impacts on global markets and our business, financial condition and liquidity are unpredictable and may not be immediately apparent.

While the Morgan Stanley disclosure may not come as much of a surprise, given its business and far-reaching tentacles, we’re starting to notice many more companies updating and changing their disclosures — from Dollar Thrifty (DTG) which added the potential — no weekend working for their compliance folks — of a downgrade to the earnings release it put out this morning. Even tiny Harris & Harris Group (TINY) had this to say about the credit downgrade in the 10-Q it filed this morning.

The downgrade in the U.S. credit rating could materially adversely affect our business, financial conditions and results of operations. On August 5, 2011, Standard & Poor’s downgraded the U.S. credit rating to AA+ from its top rank of AAA. The current U.S. debt ceiling and budget deficit concerns have increased the possibility of other credit-rating agency downgrades and an economic slowdown. The downgrade of the U.S. credit rating could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world.

We’re quite sure that more of these will continue to trickle in throughout the day and over the next few days as the impact of the downgrade starts to be more widely understood. And we’ll continue to watch them.

Image source: ANDREW BURTON/GETTY IMAGES

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