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S&P Downgrades Fannie and Freddie Credit Ratings August 8, 2011

Posted by seeineye in : Politics , add a comment

Fannie-Mae-Headquarters

Standard & Poor’s downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac Monday, expanding on its decision to downgrade U.S. debt in a market-roiling set of announcements.

President Obama is expected to discuss the first-ever downgrade at 1 p.m. ET. The White House has kept mostly silent since S&P made its decision public Friday night.

As lawmakers on both sides of the aisle look to assign blame for the downgrade, S&P announced a slew of other changes Monday. Among the lowered ratings are: 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.

The downgrades mirrored the AAA to AA+ ratings drop given to the U.S. government.

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.

On a volatile day for Wall Street, stocks plunged further after the announcement. The Dow Jones industrial average fell nearly 300 points, or 3.2 percent. The S&P 500 stock index tumbled nearly 5 percent. Investors seeking safety drove gold prices up and Treasury yields down.

The decision only fuels the politically charged atmosphere in Washington. Democrats are blaming the Tea Party for contributing to political deadlock in Washington, which the S&P cited as its main reason for its continued negative outlook.

Republicans are blaming Democrats for not going far enough in tackling U.S. debt, another factor cited by S&P. Others are questioning the credibility of S&P altogether, after the rating agencies were faulted for contributing to the subprime mortgage crisis.

House Republican Leader Eric Cantor’s office said in an email Monday that the president should avoid “bashing” the rating agency and instead work to make significant spending cuts and reforms to rein in the debt.

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 on Friday to lower the long-term U.S. debt from AAA to AA+.
S&P on Friday said that it was downgrading U.S. debt for the first time in history because it 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.

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+.

The Associated Press contributed to this report.