Reuters/New York
Credit ratings for the main arteries of the US financial system—the Depository Trust Co, National Securities Clearing Corp, Fixed Income Clearing Corp and the Options Clearing Corp—were cut one notch to AA-plus by Standard & Poor’s Ratings Services yesterday.
Street signs at the corner of Wall and Broad Streets at the New York Stock Exchange yesterday. Falling equity prices could clip New York City’s economy by denting tax revenue and profits on Wall Street, its hometown industry
These institutions, previously rated AAA by S&P, clear and process trades and are crucial to the daily workings of the US financial markets.
S&P in a statement said the downgrades were due to its lowering of the US sovereign credit rating late on Friday, a decision that is prompting the credit agency to review and in some cases slice the ratings of a host of entities whose financial health depends heavily on the federal government.
The impact of S&P’s decision, based on its analysis that Congress and the Obama administration have not done enough to compress the budget deficit and rising debt burden, is reverberating around the globe. All of the effects of the downgrade are neither clear nor immediate.
Morgan Stanley yesterday warned: “Because of the unprecedented nature of negative credit rating actions with respect to US government obligations, the ultimate impacts on global markets and our business, financial condition and liquidity are unpredictable and may not be immediately apparent.
S&P—the only one to cut the US credit 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.”
Still, the credit agency said: “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 “shifts in the macroeconomic environment and the long-term stability of US capital markets.” Stock markets fell around the globe in the first day of trading after S&P’s historic downgrade of the US, though US Treasury bonds rallied.
Falling equity prices could clip New York City’s economy by denting tax revenue and profits on Wall Street, its hometown industry.
The US municipal market within a few hours should get more guidance from S&P on the ratings of states and municipalities. The credit agency now rates 13 states at AAA.
S&P is reviewing the impact of the country’s debt consolidation plan on the budgets of states and municipalities, David Beers, who leads the agency’s sovereign ratings group, said yesterday.
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 US 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.
There is little doubt that S&P will downgrade the six insurers it still rates AAA, including the military-focused insurer USAA and the teacher-centric TIAA. New York Life, one of the six, told Reuters last month it had been told by S&P it could not have a higher credit rating than its sovereign. Even so, the downgrade is unlikely to affect the six in any substantial way, just as the government’s lower credit rating is unlikely to hurt the insurance industry in general.
