Could the US Lose its Triple AAA Credit Rating?

That’s the issue raised by a S&P report on government-sponsored enterprises (GSEs) — Fannie Mae (FNM), Freddie Mac (FRE) & Sallie Mae (SLM)

The performance of government-sponsored enterprises like Fannie Mae and Freddie Mac could have a direct impact on the national economy and, more importantly, U.S. credit standing.

So-called GSEs enjoy implicit government guarantees and could cause the U.S. to lose its sterling triple-A rating if the government were forced to come to their rescue, Standard & Poor’s said in a report Monday.

"Even though…credit damage from GSEs is unlikely, the greater risk to the U.S. lies with them than with broker-dealers," the report noted. . . . While this credit crunch has hurt financial markets, S&P notes that it hasn’t threatened the standing of the nation’s credit quality upon which U.S. Treasurys and debt priced off this government debt depend. But should a protracted recession cause Fannie and Freddie to buckle, the U.S. rating would be in danger.

To be blunt, I don’t think Standard & Poor has the stones. Their original ratings on RMBS/CDOs shows they are a pay-for-play institution, and their cowardly refusal to downgrade the mono duolines is further proof of their cowardice.

They wouldn’t/couldn’t downgrade Treasuries, as it would cost the U.S. government so much more in financing costs as to cause a depression — estimates are for between 1-1.5 trillion dollars.

Source:
Fannie, Freddie Could Hurt U.S. Credit
PRABHA NATARAJAN
April 15, 2008; Page C2
http://online.wsj.com/article/SB120818189112412691.html

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What's been said:

Discussions found on the web:
  1. SausalitoMike commented on Apr 15

    Good points, Barry, but I don’t think S&P has to lower U.S. debt ratings, if Fannie/Freddie get into trouble, for the U.S. to pay higher interest charges. The rest of the world, from whom we borrow so much, will consider us a greater credit risk, with or without a ratings downgrade.

  2. michael schumacher commented on Apr 15

    How about getting back the $1 million/yr. that FNM pays Franklin Raines to play golf??

    Not going to make a dent but it’s a start….

    Ciao
    MS

  3. DL commented on Apr 15

    No reason to downgrade treasuries. The government won’t default; they’ll just inflate.

  4. johnnyvee@yahoo.com commented on Apr 15

    What the F*ck does a AAA mean these days anyway? One day we talk about how the ratings game is Bullsh!t, then the next we discuss downgrades like the ratings are legitimate in the first place. This post is a bit disingenuous and insulting.

  5. rj commented on Apr 15

    “The rest of the world, from whom we borrow so much, will consider us a greater credit risk, with or without a ratings downgrade.”

    Does that really apply though? I think most people that buy our bonds and stuff do it more for political than financial reasons.

  6. Scott commented on Apr 15

    “To be blunt, I don’t think Standard & Poor has the stones.”

    My bet for the NY Times quote. If they have the stones.

  7. KnotRP commented on Apr 15

    Econobrowser asked this question back in August 2007, and I answered that the spread between corporates and treasuries were narrowing NOT because corporates were getting less risky, but because treasuries were actually getting more risky (which people don’t really expect):

    http://www.econbrowser.com/archives/2007/08/wheres_the_risk.html

    The only thing that’s been contained is an economist’s ability to think unconventionally.

  8. Estragon commented on Apr 15

    DL & Mike have it right. There’s a near zero probability of an outright default on US government debt as long as FX risk is born by offshore lenders, so AAA is appropriate.

    “…as it would cost the U.S. government so much more in financing costs as to cause a depression…”. This is nonsense, unless we assume taxes would be raised to pay for it. Yeah right. Again, not in a world were the offshore lender takes FX risk.

  9. KnotRP commented on Apr 15

    (typo: it was Econbrowser — here’s the point…the Feds
    started degrading their credit rating quite a while ago)

    > Do you have an answer to that question?

    Yes.

    It’s entirely possible to have a low spread between two highly risky investments. There is an implicit assumption in the conclusion that Treasuries are always and everywhere fixed at low risk, mostly because we’re used to it being that way, and that if the spread is low, it implies the corporate component is low by association. Treasury risk is rising *up* to meet Corporate risk as we head into a recession. What this means to me is that there is simply no good place to preserve wealth at the moment.

    Posted by: KnotRP at August 21, 2007 02:09 AM

  10. KnotRP commented on Apr 15

    Devaluation is default by another name.

  11. Kp commented on Apr 15

    I’m sorry but S&P, Moody’s, Fitch….have ZERO credibility. The dollar sell-off has done the downgrading for them anyway.

  12. BDG123 commented on Apr 15

    This question was once posed to Stan Jonas, someone who is likely infinitely more knowledgable on the topic than anyone posting on this blog. He scoffed at such a notion. I think the point is, the U.S. is the benchmark against which all other ratings are made. If that would ever be jeopardized, the would likely see the end of the world as we know it. And everyone posting on this blog, myself included, would be scrounging for gruel in a world that would make Mad Max tremble with fear.

    People throw around these remarks and suppositions like they are candy. It’s really quite silly to entertain that question at this point in time. If anyone loses their credit rating it would the EU countries and emerging markets. But, since people can’t seem to see the forest through the trees………….

  13. DonKei commented on Apr 15

    Downgrading a country’s credit rating that prints the money used to repay its obligations is ridiculous.

    What they might have said, instead, is that the US can’t continue to print greenbacks to nationalize the mortgage industry and not suffer some consequences for it–like the real possibility of having a worthless dollar.

    Argentina defaulted on its bonds because they ran out of money, and didn’t own the presses (dollar) in which the bonds were denominated.

    Unfortunately, the result is much the same–either a worthless currency or a worthless bond–gets you to the same depressing (depressed) place economically.

  14. Bud commented on Apr 15

    I have to agree with BDG123.

  15. Estragon commented on Apr 15

    KnotRP – “Devaluation is default by another name”

    Not quite. AAA (S&P) simply means “An obligor rated ‘AAA’ has extremely strong capacity to meet its financial commitments”. US treasuries commit to pay interest and principle in USD at specific times. In this case, the obligor can simply print USD to meet that obligation.

    I agree entirely that the resulting devaluation is a defacto default, but that isn’t what S&P rates.

  16. dave54 commented on Apr 15

    BREAKING NEWS: On the housing front…
    11242 SHANNANDOAH ST., ADELANTO, CA., has sold ($217,500.)

    Our long national nightmare may be over!

  17. super-anon commented on Apr 15

    No reason to downgrade treasuries. The government won’t default; they’ll just inflate.

    Inflating the money supply to reduce debt burden is fundamentally a form of default.

    Even if S&P doesn’t downgrade US treasuries, the market probably will if the US tries to monetize huge amounts of mortgage debt.

    It doesn’t make sense to hold USD denominated financial assets if the US is going to bankrupt itself and default on its debt either explicitly by not making interest payments or implicitly by making interest payments with devalued currency (inflation).

    A massive mortgage bailout may ultimately mean the death of the dollar.

  18. Tim Bassett commented on Apr 15

    Depends on ivestors, when overseas investors didn’t want to hold JGBs because of their low yields (generally a sign of high credit quality) much pressure was put on agencies to downgrade them so they would no loger be included in the banchmark govvy indices. This was promptly done despite the fact that the Japs were the worlds largest creditors at the time and could presumably print Yen. On the other hand look at all the shit that remains AAA as index trackers want to avoid becoming forced sellers. Credit ratings, sovereign or otherwise, are a next to useless indicator. Mind you if the US was downgraded I doubt it would make any practical difference, didn’t exactly cause JGB yields to spike!!

  19. pmorrisonfl commented on Apr 15

    BDG123 writes…
    > I think the point is, the U.S. is the
    > benchmark against which all other ratings > are made. If that would ever be
    > jeopardized, the would likely see the end > of the world as we know it.

    I think you are right. That doesn’t mean you or I should be comfortable. The US became the benchmark based on a much more solid financial standing. These things change over history, and it may be that we are in historic times.

  20. wally commented on Apr 15

    A real key is whether the world follows the US into recession. (My guess is ‘yes’).
    If it does, the US is probably OK and may lead the world out. If it does not, the US is in for some extremely painful and humiliating years.

  21. Dane R commented on Apr 15

    You have a great blog here.

    Your information is really informative and accurate. Some really interesting topics for us all to think about today!

    AAA aint much these days..

  22. stuart commented on Apr 15

    RE: comments that it can’t or won’t happen. I’m quite positive someone said the same thing about the British Pound somewhere in between WWI and WWII.

  23. brasil commented on Apr 15

    …in this death of the dollar scenario ..what happens to the holders of US treasuries …all that supposed wealth evaporates …who buys those treasuries ..once they are unwanted..my understanding is this is a closed system..and interest rates must rise but so what..it is necessary …high energy and higher interest rates are the inputs of growth…

  24. AGG commented on Apr 15

    Snarky ironic news flash from Jim Rogers in China: Wise man say Anglo Saxon letters no good for asset security assessment. Must used Chinese characters only. ><^#*Renimbi-Yuan rating.

  25. Pat G. commented on Apr 15

    We lost that awhile ago.

  26. Blissex commented on Apr 15

    I am starting to believe what I read some days ago: that Moody’s and S&P are under investigation for malpractices during their profit-oriented rating of mortgage based securities, and that the threats both Moody’s and S&P have made to downgrade USA debt are most likely warning shots to the USA government to leave them alone or else…

  27. Douglas Watts commented on Apr 15

    Where’s Roma?

    What am I, a leash ?

    — S&P ratings service.

  28. BG commented on Apr 15

    Well I see where oil is way up today. I don’t guess I need to check what the dollar did. It obviously was down again!!

    I tell you, we are all in a world of hurt!! We have all of these white elephants in the room and just ignore them all.

    Maybe it’s better that way. We are in so deep, we couldn’t (immediately) do anything anyway. This thing has been building for decades.

    I think we have arrived.

    I also noticed the market was up +66 today. I’m not in the market. I really don’t care that much one way or another. What bothers me is that I bought $50 worth of gas today and my tank still isn’t full!!!

    Our economy is being strangled to death by the high cost of energy and the markets don’t seem to care. I care. I just filled-up!!

  29. dave54 commented on Apr 15

    ON YOUR KNEES AMERICA: The Pope of all markets [Jim Rogers] say’s over.

  30. Jeremiah commented on Apr 15

    Does anyone else read this as S&P pushing for “regime change?”

    I read a subtext here of “Change management and you get to keep your nice rating. Stay the course, and you get to try out life as a A or less….”

    What say ye?

  31. rj commented on Apr 15

    “Does anyone else read this as S&P pushing for “regime change?”

    I read a subtext here of “Change management and you get to keep your nice rating. Stay the course, and you get to try out life as a A or less….”

    What say ye?”

    I say that ye are reading far too much into things.

  32. Matty commented on Apr 15

    My initial thoughts when reading this echo Blissex’s 3:34 posting. Seems like S&P is taking the opportunity to use its bully pulpit while it can, reminding the government that life could become more difficult if S&P begins to see action taken against it. I’ve wondered for a while why there hasn’t been more public outcry or special investigations over the agencies’ complicity in this mess. When it gets right down to it, they’re the most culpable parties in this whole affair, in my opinion– more so than the banks, investment firms, hedge funds, mortgage brokers, borrowers, guarantors, or even the Federal Reserve. Maybe this is the initial indicator that something’s brewing. It wouldn’t surprise me to see the government announce investigations on this front in the near future.

    As for those who say that the agencies have no credibility whatsoever, while the court of public opinion has dented their images, until we get new and better mechanisms for rating debt, Moody’s, Fitch, and S&P are what we’ve got. Their ratings, like it or not, are still the benchmarks by which credit is priced.

  33. alexd commented on Apr 15

    Although it is a scenerio that is akin to something out of a novel, the most apt reply to a threat to the gov. by S&P, Fitch and Moodys would be a response by the gov. of a very private physical threat to the people who made the the downgrade threat.

    I presume it would start with a horse’s head on the CEO’s bed…….

  34. wunsacon commented on Apr 15

    >> This question was once posed to Stan Jonas, someone who is likely infinitely more knowledgable on the topic than anyone posting on this blog. …
    People throw around these remarks and suppositions like they are candy.
    >> Posted by: BDG123 | Apr 15, 2008 1:24:51 PM

    On the one hand, you have a point. On the other, where does that leave us? It suggests to me we should leave the thinking and discussion to Stan and, maybe, you. I don’t think that’s healthy.

  35. BDG123 commented on Apr 15

    Where does that leave us? It leaves us where we are. Once again in a financial crisis as we have seen dozens of times in the last one hundred years. Debt up to our eyeballs as has happened before. A tough economic environment that is going to get tougher. And……….a bout of taxing the rich to pay for our misdeeds. Why? Because the mob is now in control. And, someone needs to pay it off. Just like we’ve seen before.

    The U.S. has not monetized any debts, has not printed money, is not debasing the currency or any of the other gibberish printed on here. The government is spending beyond what it should and that might be interpreted as debasing the currency but it isn’t because of the Federal Reserve. It seems more and more that not only do the bulls not know what they are talking about but it seems that way for many of the bears.

  36. dug commented on Apr 15

    While a government can inflate away all it’s debt most reach a point where default is the lesser of two evils, default being far less damaging than the total collapse of the economy (and the potential loss of political power that could result from the reemergence of commodity money which the gov’t wouldn’t have a monopoly on).

    Regarding the GSE’s it’s not if but when they will blow. Their mission is to lend to people who are bad risks, even before the current crisis they had accounting and derivatives problems, and the responses to the housing bubble bursting seem to all involve giving them more leeway to dive headfirst into the deep end of the stupidity pool with some moral hazard concrete blocks on their feet. That isn’t what I call a recipe for success.

  37. jult52 commented on Apr 16

    Ratings agencies don’t determine market yields. They are a lagging indicator much of the time, in fact. KnotRP alluded to this fact, but it’s worth spelling out since many posters don’t seem to understand that ratings agencies contribute to but don’t determine yields.

  38. Lee commented on Apr 16

    I’m sorry. Did you say hurt its AAA Credit rating? I’m not sure how the Gov can help/hurt a GSA program since the US gov’t itself needs so much help itself. Perhaps putting prayer back in schools or the pledge of allegiance will help. At this point, we need a miracle that only God and His saints can turnaround…

  39. WestCoastMan Big D*%@ commented on Jun 4

    If /When the world does not need to purchase goods (cars/iron/computers) or services (military)from us and there is an alternative to invest their USD into another asset instead of treasuries we should have our AAA rating.

    However, as world decides to invest at home and increase currency value vs. the dollar
    our rates will signficantly increase with/without a debt rating downgrade..

    If the US financial position has changed significantly, to the point that the process of surplus nations speeding up their own local investment then a downgrade is warranted. Still investment grade, but perhaps not the safest investment.

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