By Joan Gralla
NEW YORK (Reuters) - Credit ratings on some of the main arteries of the U.S. financial system -- from clearing houses to government mortgage agencies -- were cut one notch to AA-plus by Standard & Poor's Ratings Services on Monday.
S&P said the downgrades, which also hit big insurers, were due to its lowering of the U.S. sovereign credit rating late on Friday. That decision prompted the agency to review ratings of a host of entities whose financial health depends heavily on the federal government.
S&P based its decision on its view that Congress and President Barack Obama have not done enough to shrink the budget deficit and rising debt burden.
Prices of Treasuries held their gains while the U.S. stock market's dive accelerated after President Barack Obama said he hopes S&P's downgrade gives lawmakers a new sense of urgency to tackle long-term deficit spending and said he did not believe the reductions could be carried out with spending cuts alone.
Corporate bond issuance ground to a halt, and even Berkshire Hathaway Inc
Four of Berkshire's peers suffered the same fate: Assured Guaranty
The ratings of four institutions that clear and process trades and are crucial to the daily workings of the U.S. financial markets were cut to AA-plus from AAA.
The firms, whose behind-the-scenes work is vital, are: the Depository Trust Co, National Securities Clearing Corp, Fixed Income Clearing Corp and the Options Clearing Corp.
Wayne Luthringshausen, chairman of the OCC, said: "This rating change will have no impact on OCC's operations or our ability to meet our obligations to OCC's clearing members."
However, Morgan Stanley
S&P -- the only ratings agency to cut the U.S. rating from the highest rank -- said the downgrade constrains the institutions because "their respective businesses and the assets they hold are concentrated in the domestic market.
"We have not changed our view of the fundamental soundness of their depository or clearing operations," it said.
Giving the four clearing firms negative outlooks, S&P cited the macro-economy and long-term stability of U.S. markets.
S&P also cut ratings on 73 funds sponsored by banks, states, counties, and cities by as much as two notches because of their direct or indirect investments in Treasuries and U.S. government agency securities.
The list included funds from BlackRock Fund Advisors
The U.S. municipal market began getting more guidance as S&P cut to AA-plus the ratings of some defeased industrial revenue bonds. The credit agency currently rates 13 states at AAA and is reviewing the impact of the country's debt consolidation plan on the budgets of states and municipalities, said David Beers, who leads the agency's sovereign ratings group.
Muni bond yields closed unchanged to three basis points lower. This follows last week's stunning rally, when the yields of some top quality tax-free bonds fell as much as 40 basis points.
As expected, S&P cut by one notch to AA-plus the ratings of Fannie Mae
The Federal Home Loan Banks were also cut to AA-plus.
(Additional reporting by Ben Berkowitz, Walter Brandimarte, Jed Horowitz, Dan Wilchens, Lauren Tara LaCapra and IFR's Danielle Robinson in New York, Dave Clarke in Washington and Karen Pierog and Doris Frankel in Chicago; Editing by James Dalgleish, Andrew Hay and Dan Grebler)