US : S&P downgrade hits scores of companies, funds

Scores of companies and entities, from the insurance business controlled by Warren Buffett to mortgage giant Fannie Mae and even including Israeli government bonds, saw their credit ratings hit Monday after S&P downgraded the United States. But Standard and Poor’s did not downgrade commercial banks, especially the four largest seen as resting on the implicit “too big to fail” policies of the government.   

As the impact of its cut of the US rating from triple-A to AA+ began to hit markets, S&P announced that numerous government-related enterprises like Fannie Mae and Freddie Mac — which hold half or more of US home mortgages — were likewise downgraded because they depend on the government’s guarantee of their own bonds.

Seventy-three investment funds — fixed-income funds, exchange-traded funds, hedge funds, and others — were downgraded, 70 of them by two notches, because they each had “significant exposure” to US government debt. Ten insurance companies were hit, five with downgrades to AA+, including TIAA, USAA and Northwestern Mutual, for their huge holdings of Treasury securities. Five others, including Berkshire Hathaway, the investment vehicle of billionaire Warren Buffett, kept their AAA ratings but were given negative outlooks.

Buffett on Saturday said his group holds $40 billion in short-term Treasury debt, but said the downgrade “doesn’t tempt me to sell. We’ll stay right there.”

“In fact, if there were a quadruple-A rating, I’d give the US that,” he said, criticizing S&P.    The downgrade hit $6 billion dollars of Israeli bonds guaranteed by the United States, only a portion of Israel’s $73 billion of debt. Ten out of 12 Federal Home Loan Banks, and the senior debt issued by the Federal Farm Credit Banks, were downgraded to AA+, because they depend on the guarantee of the federal government.

Three companies which operate retail services on US military bases were downgraded. Key securities industry clearing operations, including The Depository Trust Co, National Securities Clearing Corp, Fixed Income Clearing Corp, and Options Clearing Corp, were also cut to AA+.    “We have not changed our view of the fundamental soundness of their depository or clearing operations,” S&P said.

“Rather, the downgrades incorporate potential incremental shifts in the macroeconomic environment and the long-term stability of the US capital markets as a consequence of the decline in the creditworthiness of the federal government.”

S&P said the US sovereign downgrade did not affect its ratings of money market funds investing in US debt, especially its short-term debt. But it warned a decline in the prices of Treasuries and government securities could hit the net asset values of these money market funds.

US banks also got off without a downgrade, even though markets have seen the largest of them implicitly reliant on the view that the government sees them as too big to be allowed to fail.

“None of the banks we rate in the US has an issuer credit rating higher than the US sovereign rating,” S&P explained. “The sovereign downgrade does not alter the government support assumptions that we factor into our ratings on four banks.”

Washington, Aug 8, 2011 (AFP)