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S&P Continues Financial Ratings Massacre

NEW YORK ( TheStreet) -- Standard & Poor's on Monday followed up on its downgrade of U.S. debt from a AAA rating to AA+, with similar downgrades for government-sponsored mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), along with 10 of the 12 Federal Home Loan Banks.

S&P lowered its long-term issuer credit ratings for Fannie, to AA+ from AAA, citing their "direct reliance on the U.S. government," after being placed into federal conservatorship in September 2008.

The agency lowered its rating for 10 of the 12 Federal Home Loan Banks to AA+ from AAA --with the Federal Home Loan Banks of Chicago Seattle having previously been lowered to AA+ -- because the FHLB system has "a very high likelihood of receiving support from the government if needed."

The ratings agency also lowered its senior debt rating for the Federal Farm Credit Banks to AA+ from AAA.

S&P also lowered its rating for "on 126 Federal Deposit Insurance Corp.-guaranteed debt issues from 30 financial institutions under the Temporary Liquidity Guarantee Program," along with four "National Credit Union Association-guaranteed debt issues."

The agency previously on Monday said in a statement that "the immediate effect" of its downgrade of U.S. Treasury paper would "be neutral to banks," since bank's regulatory capital requirements would be unaffected, and the Federal Reserve would "continue to accept Treasuries as collateral for overnight borrowings, with no capital penalty."

The agency also said that "due to the downgrade, longer-term interest rates will likely start to rise gradually, as buyers of Treasury bonds demand higher rates to compensate for the added riskiness of U.S. Treasuries," but that with U.S. treasuries maintaining their status as the "preferred place for flight-to-safety movements...the net effect should be a slight increase in long-term rates. "

S&P said that it expected "bank net interest margins to increase slightly, going forward," with loan quality "unchanged by the downgrade."

S&P's comforting words had no effect on the market, as investors remained quite sour on the banking sector early during Monday's trading session, with the KBW Bank Index (I:BKX) down 5% to 39.54, after last week's 10% decline.

Shares of Bank of America (BACO) were down over 9% to $7.43 in early trading, after the nation's largest banks saw its share plunge 16% last week.

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