S&P downgrades Fannie and Freddie, U.S.-backed debt
By DANIEL WAGNER and DEREK KRAVITZ AP Economics Writers August 8, 2011 6:26PM
Updated: September 10, 2011 12:47AM
Standard & Poor’s Ratings Services on Monday downgraded the credit ratings of Fannie Mae and Freddie Mac and other entities linked to long-term U.S. debt, including 32 banks and credit unions and four major clearinghouses 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.
The downgrade of the mortgage giants Fannie and Freddie reflected their “direct reliance” on the U.S. government, S&P said. The lower ratings contributed to the sell-off, analysts said.
It’s unclear how the lower credit rating would affect consumers. The downgrade applied only to corporate bonds, not the mortgage-backed securities that Fannie and Freddie issue.
Banks could adopt tougher lending standards for homebuyers, if they felt there was a greater risk because of the downgrade. But it is unlikely to affect mortgage rates, which are already near record lows.
S&P also downgraded four clearinghouses: National Securities Clearing Corp., Fixed Income Clearing Corp. Depository Trust Co., and Chicago-based Options Clearing Corp
Clearinghouses perform crucial tasks for the markets. They connect sellers and buyers and ensure that both parties hand over the money or investments that they promised. They don’t have explicit backing from the U.S. government.
S&P said it downgraded clearinghouses because their revenue is tied to U.S. trading activity.
The clearinghouses said the downgrade would not change how they value securities used as collateral.
Options Clearing Corp., said the change will not harm its ability to execute trades for customers. The OCC said S&P was following a “lockstep approach” in lowering its credit rating along with that of U.S. sovereign debt.
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+.
Municipal bonds linked to U.S. backed debt also were downgraded Monday, CNNMoney reported. S&P stripped AAA ratings from Miami; Tacoma, Wash.; Atlanta Downtown Development Authority; and the Board of Governors of the University of North Carolina. S&P is expected to downgrades about $150 billion worth of municipal bonds, or 3 percent of the municipal bond market, CNNMoney said.
Chicago Chief Finanical Officer Lois Scott said the city anticipates “very little impact on our bonds” and is monitoring the situation.
“Chicago does not rely as heavily on federal funding as some issuers, so we are more insulated from the current round of rating changes than other governments that are more reliant on federal dollars,” said Scott.
The state of Illinois has not yet been told of any change in its rating, said Kelly Kraft, Gov. Quinn’s budget spokeswoman. Illinois’ current rating from S&P is an A-Plus with a negative outlook.
Speculation is that, if S&P downgrades the 50 states’ ratings, Illinois overall rating would drop to A2-Minus, which could mean a one-half of 1 percentage point increase in interest rate payments on future bond issues. For a $2 billion to $3 billion capital plan bond issue such as the state is planning this fall, such an increase would cost hundreds of millions more in interest.
Contributing: Sun-Times staff