First word out of Paulson's mouth had to start with S and end with it.
S&P Lowers Some Fannie,
Freddie Securities Ratings
August 11, 2008 5:13 p.m.
The ratings agency cut ratings on preferred stock and subordinated debt for both companies to A minus from AA minus. It left their senior debt ratings at AAA.
The AAA rating reflects the belief that the U.S. government would have to back the senior debt of the two mortgage companies in a crisis. But there is less assurance that the government would protect holders of preferred stock and subordinated debt. The companies' new regulator "has receivership powers that would place the non-senior creditors … at a greater risk of nonpayment," S&P said, adding that this applies especially to dividend payments on preferred stock.
Fannie and Freddie were chartered by Congress to assure a steady flow of money for home mortgages. As defaults on home mortgages soar, they have recorded combined losses of about $14 billion over the past four quarters.
The downgrades will put "negative pressure" on any new issues of preferred by the companies, Federal Financial Analytics Inc., a Washington research firm, said in a report. The firm said that banks outside the U.S. that already hold the affected securities will have to adjust their risk-based capital holdings as a result of the downgrades.
Freddie has said it plans to raise at least $5.5 billion of capital, likely through offerings of common and preferred stock, but is waiting for market conditions to improve. Fannie raised $7.4 billion through common and preferred offerings in May but said last week that it may need to raise more capital eventually.
S&P cited an "uncertain appetite" for Freddie's preferred stock as a concern.
On the New York Stock Exchange Monday, Freddie shares fell to 5.1% to $5.60. Fannie was down 7.2%% to $8.40.