Fannie And Freddie Downgraded

S&P downgrades home-loan giants that depend on U.S. government.

August 8, 2011, 5:09 AM

Aug. 8, 2011— -- Standard & Poor's today downgraded the debt of Fannie Mae, Freddie Mac and 10 of 12 Federal Home Loan Banks that were propped up by the federal government after the financial crisis of 2008.

S&P reduced their ratings one notch, to AA+ from AAA, its very highest rating. The agencies guarantee or own more than half of the $5 trillion in U.S. mortgage debt.

President Obama, who had been silent since S&P announced Friday evening it was downgrading the U.S. government's debt, belittled the downgrade in a statement this afternoon.

"We didn't need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least," he said.

He then turned more positive: "Markets will rise and fall, but this is the United States of America. No matter what some ratings agency may say, this is a triple-A country."

The downgrade of the housing lenders was no surprise in light of Friday's news, but the U.S. stock market -- already spooked by Friday's news -- reacted negatively anyhow. The Dow Jones Industrial Average dropped 634.76 for the day, closing at 10,809.65. And the price of gold, considered a safe haven in uncertain times, topped $1,700 per ounce for the first time ever.

"The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government," Standard & Poor's said in a statement.

Their downgrade "was inevitable," said Robert Litan, a former Clinton administration budget official who is now vice president for research and policy at the Kauffman Group. "If the U.S. government is downgraded it follows logically they would have to be downgraded too."

"In the short run and long run it's a modest impact in terms of interest rates but the real question is what is it going to do psychologically to consumer spending," Litan said in an interview with "This just adds to the overall anxiety. It freezes a lot of plans to buy big ticket items like homes and cars. For companies it could impact investment."

What's next then?

"The states and locality ratings will be next because of the interest rates benchmarked against U.S. treasuries so there is a linkage between that debt," he said. "In an environment of budget austerity this is not good for states and localities. This will trigger another closer look at state and local finances. Some states that were in trouble already and some in the bubble."

The announcements left many buyers -- from corporations to average investors -- wondering how to react.

"Fear of a repeat of 2008 is what's really driving investments," Gary Schlossberg, senior economist with Wells Capital Management, in an interview with The Associated Press. Many economists said the fear was misplaced, though, arguing that markets were in a long-overdue correction after long upward runs in 2009 and 2010.

Click Here to See 5 Ways the Downgrading of the U.S. Credit Rating Could Affect You.

Even with the administration's heated criticism of S&P over the downgrading, the rating agency is not only standing by the decision, it is saying a further downgrade is possible if the United States doesn't solve its debt problem in two years.

The rating agency's managing director John Chambers said today on ABC News' "This Week with Christiane Amanpour" that there's "at least a one in three chance of a downgrade over that period." He has blamed the downgrade squarely on Washington politics, saying "this is not a serious way to run a country."

"Our job is to hold the mirror up to nature, and what we are telling investors is that we have a spectrum that runs from AAA to D," Chambers told ABC News. "And what we're seeing is threat the United States government is slightly less credit worthy."

The rating agency says that Washington has shown an inability to reach political consensus, which was highlighted by the debate on the debt ceiling, and this leaves the U.S. "less stable, less effective." S&P is one of the three major rating agencies that highlight investment risk, and is considered a golden standard among rating agencies.

However, all three agency's reputations were tarnished after mortgage-backed securities that they gave a AAA rating contributed to the economic collapse of 2007 and 2008. After S&P was pulled before Congress to testify about the faulty ratings, some now question the organization's reliability.

"Now they come in and they flex as if they've been this bastion of correctness when they've completely been wrong and so now everything they do is suspect in my view," said president of Ariel Investments Melody Hobson. Some wonder if S&P is rating the political system instead of the financial system.

While the White House pushed back against the downgrade, pointing out that the rating agency made a $2 trillion math mistake, White House spokesman Jay Carney conceded that reaching compromise on the debt ceiling debate took "too long and was at times too divisive."

"We must do better to make clear our nation's will, capacity and commitment to work together to tackle our major fiscal and economic challenges," Carney said in a statement.

Many experts are saying not to read into the ratings downgrade too much, pointing out that the other two major rating agencies still have the U.S. ranking at AAA and saying that the United States is still in a strong position.

Japan's Finance Minister Yoshihiko Noda maintains that the downgrade hasn't shaken his confidence in U.S. bonds, calling them "an attractive financial product" and told reporters that market trust in the dollar and U.S. Treasuries hasn't wavered.

Still, the downgrade has left many Americans concerned that the country is losing its footing as the global leader.

"We have to figure out though how we're going to play going forward and I think if don't get our house in order we're in danger of slipping in our ability to interact as a global player," said Gary Knell, a resident of New York.

The Associated Press and ABC News Radio contributed to this report.

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