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.

Other large U.S. banks seeing major declines early Monday included Regions Financial ( RF), with shares sliding 7.5% to $4.72, following last week's 16% decline; Citigroup ( C), down 7% to $31.22, after a 13% pullback last week; Fifth Third Bancorp ( FITB), down 6% to $10.61, following an 11% decline last week, and SunTrust ( STI), also down 6% to $20.31, following a 12% drop last week.

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-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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