S&P Downgrades Fannie and Freddie, US Markets Fall Sharply

[kristy]

WASHINGTON (AP) -- Standard & Poor's Ratings Services on Monday downgraded the credit ratings of Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt.

 

The agency also lowered the ratings for: farm lenders; long-term U.S. government-backed debt issued by 32 banks and credit unions; and three major clearinghouses, which are used to execute trades of stocks, bonds and options.

 

All the downgrades were from AAA to AA+, reflecting the same downgrade S&P made of long-term U.S. government debt on Friday.

 

S&P said the agencies and banks all have debt that is exposed to economic volatility and a further downgrade of long-term U.S. debt. Their creditworthiness hinges on the U.S. government's ability to pay its own creditors.

 

Stocks plunged further after the downgrades. The Dow Jones industrial average fell more than 300 points, or 2.8 percent. The S&P 500 stock index tumbled 3.4 percent. Investors seeking safety drove gold prices up and Treasury yields down.

 

Monday's downgrades of the mortgage giants Fannie and Freddie reflected their "direct reliance" on the U.S. government, S&P said.

 

Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. Their downgrade might force anyone looking to buy a home to pay higher mortgage rates.

 

Officials at Standard & Poor's say they will also indicate shortly how local and state governments will be affected by their decision to lower the long-term U.S. debt.

 

S&P on Friday said it downgraded U.S. debt for the first time in history because the credit rating agency lacks confidence that political leaders will make the choices needed to avert a long-term fiscal crisis.

 

The downgrade of long-term debt issued by the U.S. government affects the banking and lending industries because many interest rates are pegged to the yields on Treasury securities. In addition, many companies use the securities as collateral that they would surrender if their bets lost value.

 

The lower credit rating for long-term U.S. debt means that it might be considered less valuable for those purposes. It might become more costly for companies to borrow or trade.

 

Some analysts said the downgrades were unlikely to have much effect on the companies named by S&P or the broader markets. They noted that Treasury yields remain low and the dollar is getting stronger -- signs that the world still sees the U.S. as a safe harbor in volatile economic times.

 

The downgrades "are as meaningless as the original action," said Daniel Alpert, managing partner at the investment bank Westwood Capital LLC in New York. He said that investors are rushing into Treasurys, and that they will do the same for "anything backed by the full faith and credit" of the U.S. government. That includes debt issued by Fannie and Freddie and bank debt that was guaranteed by regulators to ease lending after the 2008 financial crisis.

 

The yield on the benchmark 10-year Treasury note fell to 2.38 percent from 2.57 percent late Friday. Analysts say traders are shifting out of bonds and European banks are snapping up U.S. debt to steel themselves for a regional financial crisis.

 

S&P Managing Director John Chambers said that the credit rating agency believes the dollar won't be weakened "under any plausible scenario." He said it will remain the dominant international currency, and that will reduce interest rates for governments and the private sector.

 

Ten of the country's 12 Federal Home Loan Banks also were downgraded from AAA to AA+. The banks of Chicago and Seattle had already been downgraded earlier to AA+.

 

A spokesman for Freddie Mac declined to comment on the move.

 

Daniel Wagner and Martin Crutsinger, AP Economics Writers @ AP

 

 

 

 

NEW YORK (AP) -- U.S. stocks are joining a global sell-off in the first trading since Standard & Poor's downgraded American debt and gave investors another reason to be anxious.

 

S&P downgraded the long-term U.S. government credit rating by one notch late Friday. The move wasn't a surprise but it came as investors were already feeling nervous about a weak U.S. economy, European debt problems and Japan's recovery from its March earthquake.

 

The Dow Jones industrial average is down 307 points in midday Monday trading, or 2.7 percent, to 11,140. The S&P 500 is down 40, or 3.3 percent, to 1,160. The Nasdaq is down 90, or 3.6 percent, to 2,442.

 

Prices for gold and Treasurys are rising because they're seen as safer investments. Gold rose above $1,700 per ounce for the first time.

 

 

Stan Choe, AP Business Writer @ AP

[CSL]

This shouldnt come as a surprise to anyone. The economy has been in a tailspin created by improper lending practices. If the Fed wouldnt of had the ability to print more money this would have happened long ago.

[Jawshot]

People should consider other political parties the next time they vote. Between Washington & Lincoln (16 presidents), 5 different political parties held the White House....2 since. peace

[Thoracic]

An interesting aspect of the S&P downgrade is the last minute removal of the economic justification. Apparently the Fed discovered the S&P miscalculated their estimates of debt reduction by $2 trillion. The crux of the mistake lies with the projection of debt reduction relative to a 'baseline' where the CBO calculated the projections based on inflation and the S&P used nominal GDP. When projected over 10 years using a different growth rate will result in a significantly different final total. The CBO estimates inflation at a 2.5% rate and nominal GDP at 5%, when they reran the numbers using the S&P method their result was $2 trillion more than S&P estimated. Basically S&P used an apples to oranges comparison and the Fed called them on it. S&P removed the economic argument from their statement and went ahead anyway based on their concern with the political climate in Washington.

While I would agree the current politics are messed up, I think S&P is trying to make up for the fact they missed the whole CDO housing debacle when they rated synthetic financial instruments as AAA when they were junk. A fundamental failure in their purpose.

 

Data source. Treasury.gov - Just the Facts: S&P's $2 Trillion Mistake