S&P cuts ratings tied to U.S. sovereign credit
Credit ratings for some of the main arteries of the U.S. financial system -- from clearing houses to government mortgage agencies -- were cut one notch to AA-plus by Standard & Poor's Ratings Services on Monday.
S&P in a statement said the downgrades -- which also hit big insurers -- were due to its lowering of the U.S. sovereign credit rating late on Friday. That decision is prompting the agency to review ratings of a host of entities whose financial health depends heavily on the federal government.
S&P based its decision on grounds the Congress and President Barack Obama have not done enough to compress the budget deficit and rising debt burden.
Morgan Stanley on Monday warned: 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. For details, see:
Even Berkshire Hathaway Inc, the heavyweight insurer run by billionaire investor Warren Buffett was swept up in the wholesale credit revisions, with S&P affirming its AA-plus rating but cutting the company's outlook to negative.
Four of Berkshire's peers suffered the same fate: Assured Guaranty, Guardian, Massachusetts Mutual, and Western & Southern. Five U.S. insurance groups were cut by one notch to AA-plus: Knights of Columbus, New York Life, Northwestern Mutual, Teachers Insurance & Annuity Association of America and United Services Automobile Association.
The ratings of four institutions that clear and process trades and are crucial to the daily workings of the U.S. financial markets were cut to AA-plus from AAA.
These institutions, which work behind the scenes but play a vital role, are: the Depository Trust Co, National Securities Clearing Corp, Fixed Income Clearing Corp and the Options Clearing Corp.
Wayne Luthringshausen, chairman of the OCC, said: This rating change will have no impact on OCC's operations or our ability to meet our obligations to OCC's clearing members.
S&P -- the only ratings agency to cut the U.S. rating from the highest rank -- said the downgrade constrains the depository and clearing houses because their respective businesses and the assets they hold are concentrated in the domestic market.
We have not changed our view of the fundamental soundness of their depository or clearing operations, it said.
Giving the four depository and clearing institutions negative outlooks, S&P also cited the long-term stability of U.S. capital markets.
The U.S. municipal market began getting more guidance as S&P cut to AA-plus the ratings of some deceased industrial revenue bonds. The credit agency now rates 13 states at AAA and it is reviewing the impact of the country's debt consolidation plan on the budgets of states and municipalities, said David Beers, who leads the agency's sovereign ratings group.
In early afternoon trade, muni bond yields were unchanged to three basis points lower. This follows last week's stunning rally when the yields of some top quality tax-free bonds fell as much as 40 basis points.
As expected, S&P cut by one notch to AA-plus the ratings of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are central to the U.S. residential mortgage market. A Freddie Mac spokesman, Doug Duvall, had no immediate comment. A Fannie Mae spokesman was not immediately available.
The Federal Home Loan Banks were also cut to AA-plus.
(Additional reporting by Ben Berkowitz, Walter Brandimarte, Jed Horowitz and Lauren Tara LaCapra in New York, Dave Clarke in Washington and Karen Pierog and Doris Frankel in Chicago; Editing by James Dalgleish and Andrew Hay)
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