<<UPDATE 2-S&P says GSEs may pose risk to US government rating
2008/04/14 14:16:32 (GMT-04:00)
Provided by: Reuters News
April 14, 2008
(Recasts; adds details, quotes)
NEW YORK, April 14 (Reuters) - Standard & Poor's Ratings Services said on Monday that the risks the government-sponsored enterprises, or GSEs, pose to the U.S. government's triple-A debt rating are far greater than those posed by broker-dealers.
In a deep and prolonged recession, the maximum potential cost of assisting the GSEs, together with loans and guarantees extended by U.S. government agencies, yields a potential fiscal cost to the government of up to 10 percent of GDP, S&P said in a statement.
The recent rescue of ailing Bear Stearns <BSC.N> highlighted the potential risks associated with supporting the broker-dealer segment of the U.S. financial system, S&P said, adding that the GSEs pose a far greater fiscal risk to the government's rating.
The maximum potential cost of assisting the broker-dealer sector remains small relative to the size of the economy, at below 3 percent of GDP, S&P said.
A U.S. Treasury spokeswoman declined to comment on the S&P report.
Fannie Mae <FNM.N> and Freddie Mac <FRE.N> are shareholder-owned, GSEs charged by Congress with supporting the housing sector by keeping money flowing in the mortgage market.
To do this, they sell debt and use the proceeds to buy mortgages from lenders, which then gives lenders the funds to make more loans. The loans are then repackaged into securities for sale to investors.
Fannie Mae and Freddie Mac also hold loans and securities in their portfolios, which are monitored by a federal regulator.
"We examine these potential costs to come to relative judgments between actual debt stocks and potential debt stocks, and between one government and another," John Chambers, chairman of Standard & Poor's sovereign rating committee, said in the statement.
Even in a scenario of severe stress, the contingent fiscal risks of broker-dealers will not threaten the U.S. government's triple-A rating, he said.
"However, under such a scenario, the size of the GSEs, coupled with their current level of common equity, could create a material fiscal burden to the government that would lead to downward pressure on its rating," Chambers noted.
In a separate report on Monday, S&P said that to aid balance-sheet growth and access the most illiquid mortgage-market segments, Fannie Mae's and Freddie Mac's capital surplus ratio was recently reduced to 20 percent from 30 percent.
The "conforming jumbo mortgage" lending limit was also increased to a maximum of $729,750 until the end of the year.
These moves follow a period that saw GSEs' market share of newly originated mortgages skyrocket to 76 percent in the fourth quarter of 2007 from 46 percent in last year's second quarter, S&P said. That market share ticked up to 80 percent for January 2008, it said.
"The mortgage GSEs face heightened demand to provide mortgage financing, which comes at a time when their need to raise capital and improve earnings has placed them under extreme pressure against the backdrop of historically weak housing markets and seized securitization markets," Victoria Wagner, a Standard & Poor's credit analyst, said in the statement.
"We expect the mortgage GSEs to raise substantial amounts of equity to meet their capital adequacy needs," she said.
S&P will be looking closely at the companies' forthcoming plans to shore up their common equity base as they attempt to preserve a double-A minus rating and limit the risk they present to ratings of the U.S. government, Wagner said.
Amitabh Arora, interest rate strategist at Lehman Brothers in New York, said the bigger issue is for the foreign exchange market rather than the rates market, adding he does not see a near-term effect.
"Clearly the more the U.S. government extends itself to underwrite the risk posed by the GSEs and others, the more the sovereign risk will go up," he said.
"I think it will loom large when the size of this federal government bailout of homeowners is announced, when it becomes clear which of these plans going through Congress comes through, what is the federal government committing itself to do and what kind of contingent risk is it taking on," he said. "Once that becomes clear, that is when this issue will become more important." (Additional reporting by Burton Frierson; editing by Gary Crosse) >>
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