UPDATE 7-S&P threatens downgrade of US financial companies

Fri Jul 15, 2011 5:45pm EDT

 * Downgrade threat hangs on U.S. debt ceiling talks
 * Insurers, clearinghouses, funds in the firing line
 * Firms with "direct links to or reliance on" gov't
 (Adds Northwestern comment)
 By Ben Berkowitz
 NEW YORK, July 15 (Reuters) - Standard & Poor's on Friday
raised the pressure on debt negotiators in Washington, saying
it could downgrade insurers, securities clearinghouses,
mortgage agencies and a laundry list of other firms without a
deal soon to lift the U.S. debt ceiling and cut the deficit.
 While S&P had already made clear it could downgrade the
United States's sovereign credit rating, the Friday move struck
directly at the heart of the financial system, raising the
prospect of knock-on effects should the country exhaust its
ability to borrow to pay bills.
 The U.S. Treasury took the last available step Friday to
try and extend that borrowing capacity. For details, see
 S&P on Friday put on review for possible downgrades a range
of powerful financial firms -- many of them little known to the
public but crucial to the country's financial infrastructure.
U.S. government securities are central to the operations of
most of the companies cited.
 They include the Depository Trust Co, which facilitates
payment transfers among major banks, as well as several Federal
Home Loan Banks and Farm Credit System Banks. They also singled
out Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), the two
government-sponsored enterprises that are central to the U.S.
residential mortgage market.
 S&P characterized its targets as "entities with direct
links to, or reliance on, the federal government."
 Separately, the agency said the four remaining U.S.
nonfinancial companies with triple-A ratings were not affected
by the downgrade threat. [ID:nWNA3843]
 "S&P is firing a warning shot, saying the entire financial
clearing system is in question," said Peter Niculescu, a
partner at Capital Markets Risk Advisors, a risk management
advisory firm in New York.
 He raised the prospect of a financing squeeze for financial
institutions if Treasury debt is downgraded. S&P said Friday it
still sees the risk of default as "small, though increasing."
 Nik Khakee, an S&P analyst who worked on the team assessing
the clearinghouses, emphasized that the decline for the triple
A-rated companies from "outlook negative" to "creditwatch
negative" -- signaling a 50 percent chance of a downgrade
within three months -- directly follows a similar change for
the debt of U.S. government securities.
 Earlier this week, Moody's also put its U.S. credit rating
on review for a possible downgrade. [ID:nN1E76C1XJ]
 Some investors downplayed the chances of a severe market
reaction if the United States is downgraded, given that the
market has known this could be coming.
 "Do you think China is going to sell all their Treasuries
when they find out the ratings are lowered? They know the
situation, they've known it all along," said James Melcher,
founder and president of Balestra Capital Ltd, a global-macro
investment manager based in New York. "They cannot sell a
significant amount of their Treasuries without running interest
rates up to 20 percent or more; they would be shooting
themselves in the foot."
 Many of the firms put on review for a possible downgrade
were quick to turn the focus back on President Barack Obama and
the congressional leaders trying to hash out a deal to stave
off a debt default.
 "Whatever happens will have nothing to do with us, and
everything to do with Washington. The hope on everyone's part
is obviously that Washington gets its act together so that both
their rating and ours can remain where they belong -- at AAA,"
said Patrick Korten, a spokesman for insurer Knights of
Columbus, which was included on the negative watch list.
 A spokesman for Goldman Sachs (GS.N), parent company to
Goldman Sachs Mitsui Marine Derivative Products LP, declined to
comment. A spokesman for New York Life said S&P told it no
financial institution can carry a higher rating or outlook than
its sovereign rating, and that the insurer believes its rating
to be fully justified.
 Northwestern Mutual said it remained "completely confident"
in its financial strength.
 Other insurers on the list were not immediately available
to comment.
 Another broad group in S&P's sights is the clearinghouses,
which guarantee contracts tied to everything from oil contracts
to shares of Google Inc (GOOG.O) and are critical to U.S.
financial market stability.
 "It's not unexpected and we don't see this as a reflection
on how OCC conducts its business," said Jim Binder, spokesman
for the Options Clearing Corp, which clears U.S. options or
futures for 14 exchanges. "It's all about what's going on in
 The U.S.-based Depository Trust & Clearing Corporation,
which provides custody and asset servicing for more than 3.6
million securities issues from the United States and 121 other
countries and territories, valued at $33.9 trillion, said the
S&P action was expected.
 "Changing the outlook on various financial institutions is
common practice for ratings agencies when the outlook on a
sovereign is changed," DTCC said in a statement. DTCC runs the
National Securities Clearing Corporation and the Depository
Trust Company.
 Freddie Mac also declined to comment. Fannie Mae did not
immediately respond to requests for comment.

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Comments (2)
Counselor1 wrote:
Say, didn’t S&P, Moody’s, etc. accept pay to rate all sorts of CDO “securities” as triple – A when they were riddled with toxic assets, liar loans, etc.? What a group of “credible” evaluators! Ha, Ha, Ha. Is the stock market blanching with fear at this Impending Doom the zero gravitas TV News Hotees of FOX, ABC, NBC, CBS, CNBC, HLN, CNN are repeatedly Big Lie – ing about? OOOh the Saddamocrats are building Deficits of Mass Destruction! We gotta invade General Welfareland and reduce the Geezers entitlements before were’re in deep trouble!

Part of the trouble is that if the the “News” exaggerates with endless uncountered enormity, they tend to “talk into existence” fictions like “Deficits of Mass Destruction.”

Jul 15, 2011 6:07pm EDT  --  Report as abuse
plaza04433 wrote:
What a lot of people do not seem to be able to understand is that even IF we can get a debt limit passed by Aug 2, the rating agencies can still downgrade both the government and our financial institutions if the process to get there looks like a bunch of kindergartners are in charge of running this nation. And right now, that is exactly what things look like.

And what would a downgrade do? It would instantly raise the deficit, interest rates, and make doing business a magnitude more difficult across the board.

Yet, the world and ratings agencies are seeing the spectacle of Tea Party simpletons like Bachmann pronouncing that a default would be acceptable, and people like Eric Cantor and his minions in the house stupidly passing up a 4 trillion dollar deal that would result in $4 of spending cuts for every $1 dollar of revenue increase. All because they signed a stupid pledge drafted by Grover Norquist, the old Jack Abramoff bag man.

Most every economist and Republican NOT in office agree that any serious deficit reduction will have to have include both spending cuts and revenue increases. The ratings agencies and world governments understand that also. So does 60 percent of the us public.

But what are the ratings agencies seeing? Obama having to deal with a bunch of Cantor lead morons! Bottom line is that no matter what happens from here on out, the story of the last few months behind closed doors will come out. And that will be the ruin, as Mitch McConnell predicted, of the Republican party once people see the deals that Obama, McConnell and Boehner took to the house, only to have Cantor lead freshman Tea Party dolts refuse to deal.

Jul 15, 2011 6:41pm EDT  --  Report as abuse
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