Business Blog Posts

While S&P had already made clear it could downgrade the United States' sovereign credit rating, the Friday move struck directly at the heart of the financial system, raising the prospect of knock-on effects should the country exhaust its ability to borrow to pay bills.

The Treasury took the last available step Friday to try and extend that borrowing capacity.

S&P on Friday put on review for possible downgrades a range of powerful financial firms -- many of them little known to the public but crucial to the country's financial infrastructure. U.S. government securities are central to the operations of most of the companies cited.

They include the Depository Trust Co, which facilitates payment transfers among major banks, as well as several Federal Home Loan Banks and Farm Credit System Banks. They also singled out Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are central to the residential mortgage market.

S&P characterized its targets as "entities with direct links to, or reliance on, the federal government."

Separately, the agency said the four remaining U.S. nonfinancial companies with triple-A ratings were not affected by the downgrade threat.

'WARNING SHOT'

"S&P is firing a warning shot, saying the entire financial clearing system is in question," said Peter Niculescu, a partner at Capital Markets Risk Advisors, a risk management advisory firm in New York.

He raised the prospect of a financing squeeze for financial institutions if Treasury debt is downgraded. S&P said Friday it still sees the risk of default as "small, though increasing."

Nik Khakee, an S&P analyst who worked on the team assessing the clearinghouses, emphasized that the decline for the triple A-rated companies from "outlook negative" to "creditwatch negative" -- signaling a 50 percent chance of a downgrade within three months -- directly follows a similar change for the debt of government securities.

Earlier this week, Moody's also put its U.S. credit rating on review for a possible downgrade.

Some investors downplayed the chances of a severe market reaction if the United States is downgraded, given that the market has known this could be coming.

"Do you think China is going to sell all their Treasuries when they find out the ratings are lowered? They know the situation, they've known it all along," said James Melcher, founder and president of Balestra Capital Ltd, a global-macro investment manager based in New York. "They cannot sell a significant amount of their Treasuries without running interest rates up to 20 percent or more; they would be shooting themselves in the foot."

ONUS ON WASHINGTON

Many of the firms put on review for a possible downgrade were quick to turn the focus back on President Barack Obama and the congressional leaders trying to hash out a deal to stave off a debt default.

"Whatever happens will have nothing to do with us, and everything to do with Washington. The hope on everyone's part is obviously that Washington gets its act together so that both their rating and ours can remain where they belong -- at AAA," said Patrick Korten, a spokesman for insurer Knights of Columbus, which was included on the negative watch list.

A spokesman for Goldman Sachs, parent company to Goldman Sachs Mitsui Marine Derivative Products LP, declined to comment. A spokesman for New York Life said S&P told it no financial institution can carry a higher rating or outlook than its sovereign rating, and that the insurer believes its rating to be fully justified.

Northwestern Mutual said it remained "completely confident" in its financial strength.

Other insurers on the list were not immediately available to comment.

Another broad group in S&P's sights is the clearinghouses, which guarantee contracts tied to everything from oil contracts to shares of Google Inc and are critical to U.S. financial market stability.

"It's not unexpected and we don't see this as a reflection on how OCC conducts its business," said Jim Binder, spokesman for the Options Clearing Corp, which clears U.S. options or futures for 14 exchanges. "It's all about what's going on in Washington."

The U.S.-based Depository Trust & Clearing Corporation, which provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at $33.9 trillion, said the S&P action was expected.

"Changing the outlook on various financial institutions is common practice for ratings agencies when the outlook on a sovereign is changed," DTCC said in a statement. DTCC runs the National Securities Clearing Corporation and the Depository Trust Company.

Freddie Mac also declined to comment. Fannie Mae did not immediately respond to requests for comment.

Europe's sovereign debt crisis, stalled budget talks in Washington and an uncertain economic backdrop have sent Wall Street on a roller coaster ride since the spring.

A health check of European banks is expected to show that as many as 15 lenders need more capital to withstand a prolonged recession, with criticism growing that the tests do not encompass the impact of a Greek default.

"We expect it to continue to be a roller coaster, driven by the European stress test, the U.S. debt and tax agreements ... and earnings," said Kim Caughey Forrest senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

"We have all this crazy stuff going on that normally the market doesn't have to deal with, and certainly doesn't have to deal with all at the same time."

Ratings agency Standard & Poor's warned there was a 1-in-2 chance it could cut the United States' triple-A rating if a deal to raise the government debt ceiling is not reached soon.

Global events have overshadowed stronger earnings from big U.S. companies like Google (GOOG.O) and JP Morgan (JPM.N). Citigroup (C.N) is set to report earnings, with investors likely to scrutinize the bank's loan book for signs it is on a sustainable path to profit growth.

S&P 500 futures rose 1.6 point and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 31 points, and Nasdaq 100 futures added 8 points.

The S&P 500 is down 2.6 percent this week, its worst week since the middle of August, 2010. Two weeks ago Wall Street posted its best week in two years.

The Nasdaq will be in focus after Google Inc (GOOG.O) reported adjusted quarterly earnings that exceeded Wall Street's most bullish forecasts, sending its shares up 13 percent in premarket trading.

There was some high profile acquisition activity. Top global miner BHP Billiton (BLT.L) is to buy U.S. gas producer Petrohawk Energy Corp (HK.N) for $12.1 billion, ramping up its bets on the booming but environmentally controversial shale gas industry. Petrohawk's shares rose nearly 65 percent.

Billionaire investor Carl Icahn said he and his affiliates offered to buy shares of Clorox Co (CLX.N) that are not owned by him for $76.50 per share in cash, valuing the company at $10.2 billion. The shares jumped 12 percent in premarket trade.

President Barack Obama suspended U.S. budget negotiations for the day to give congressional leaders a chance to come up with a plan of action on how to unblock talks meant to cut deficits and avert a debt default.

U.S. stocks fell on Thursday as Fed Chairman Ben Bernanke backed off hints additional near-term stimulus could be on the way, undercutting comments from a day earlier that spurred a late-session rally in equities.

The U.S. consumer price index (CPI), due at 8:30 (1230 GMT), is seen falling 0.1 percent in June after a 0.2 percent rise in May, giving an unchanged annualized inflation rate of 3.6 percent.

July's Empire State index is also due at 8:30 (1230 GMT), when investors will look for signs of stabilization in the manufacturing sector, while the July Reuters/University of Michigan consumer sentiment survey will be released at 9:55 (1355 GMT).

(Editing by Kenneth Barry)

The 43-year-old Brooks, a former editor of the scandal-hit News of the World newspaper and of the flagship tabloid the Sun, was a close confidante of Murdoch, who had signaled her importance to him when he flew into London to manage the crisis at the News International subsidiary.

The public disgust that erupted over reports that one of News Corp's newspapers had hacked into the voicemails of murder victims has so far forced Murdoch to shut down the News of the World and pull a $12-billion bid to buy the shares he does not own in British satellite broadcaster BSkyB.

Murdoch, 80, long courted by Britain's political elite, faces a showdown with parliament on Tuesday when lawmakers on the media committee grill him, his son James, 38, as well as Brooks to find out more about the phone hacking practices.

Tom Mockridge, CEO of the company's Italian pay TV arm Sky Italia, will replace Brooks, who spent more than two decades at the newspaper company. Analysts may welcome the New Zealander's background in television, an area in which News Corp is keen to expand, as well as his lack of direct involvement in the scandal-hit British newspaper business during the past decade.

British Prime Minister David Cameron, as well as his Labour opponents, had said Brooks should have quit. Cameron said last week that an initial offer by her to resign should have been accepted. On Thursday, an influential Saudi investor in News Corp said he agreed.

Brooks, whose youth, mane of red hair and sharp tongue have helped give her a high public profile in Britain, said in a message to staff: "My desire to remain on the bridge has made me a focal point of the debate. This is now detracting attention from all our honest endeavors to fix the problems of the past.

"Therefore I have given Rupert and James Murdoch my resignation. While it has been a subject of discussion, this time my resignation has been accepted."

A week ago, she had told News of the World staff, who were sacked with the paper's closure, that she would remain -- causing anger among many of the 200 being laid off. Some accused Murdoch of sacrificing their jobs to save hers.

DEFIANT TONE

Murdoch struck a defiant tone on Friday, saying his media empire would recover from a scandal over alleged phone hacking crimes at the News of the World and an FBI inquiry into similar allegations in the United States.

Murdoch has denied that News Corp was drawing up plans to separate its newspaper holdings, which are at the heart of the controversy, from the rest of the media company.

It includes the Fox broadcast network in the U.S., the 20th Century Fox movie studio and newspapers around the world, including The Wall Street Journal, the New York Post and Britain's The Times and the Sun tabloid.

Murdoch said News Corp had handled the crisis "extremely well in every way possible" making just "minor mistakes" and called reports he would split off his newspaper assets "pure rubbish."

Speaking to the Wall Street Journal, Murdoch said his son James had acted "as fast as he could, the moment he could" to deal with the scandal.

Murdoch, who is in London managing the crisis, said damage to the company was "nothing that will not be recovered."

"We have a reputation of great good works in this country," he added.

However, rival publishers are seeking to capitalize on the company's weakness.

Britain's Daily Mail & General Trust is planning a new mass-market Sunday tabloid to fill the gap left by the News of the World, which had a weekly sale of around 2.7 million.

A source told Reuters the newspaper could be published as early as next weekend if a dummy this weekend went well.

"END OF A DICTATORSHIP"

The Murdochs' hold over British politics appears to have been broken by the scandal.

They were forced to agree to appear before parliament after Prime Minister Cameron said they should attend and as politicians across the political spectrum united in denouncing the hacking that initially had seemed to focus on celebrities and politicians but has become seen as far more widespread.

Murdoch said lies had been told about his company in the British parliament and that he wanted to put the record straight: "We think it's important to absolutely establish our integrity in the eyes of the public," he told the Journal.

British Business Secretary Vince Cable, on BBC radio, said of the swift volte-face by politicians queuing up to condemn the Murdochs: "It is a little bit like the end of a dictatorship when everybody suddenly discovers they were against the dictator."

Cable lost responsibility for media policy last December after he was taped saying he had "declared war on Murdoch."

(Additional reporting by Stefano Ambrogi, Michael Holden, Matt Falloon, Mark Hosenball, Tim Castle and Karolina Tagaris in London, Paul Thomasch, Basil Katz, Carlyn Kolker and Yinka Adegoke in New York; Writing by Keith Weir; Editing by Alastair Macdonald)

Putting the U.S. on negative watch, S&P warned that it could cut the rating as soon as this month if talks between the White House and Republicans remain stalemated. Any cut would be by one or more notches, it added.

The dollar fell on the news. U.S. Treasuries were largely steady.

John Chambers, the chairman of S&P's sovereign ratings committee, said "this is the time" for the two sides to tackle the country's long-term debt problems.

"If you get a small agreement, that will lead to a downgrade," he told Reuters in an interview.

A downgrade could raise borrowing costs not only for the United States but also for loans that use the Treasury rate as a benchmark.

Some money managers that are restricted to investing only in AAA-rated assets would be forced to dump Treasuries, which could spread disruption through global financial markets.

The S&P warning comes just a day after Moody's Investors Service warned the U.S. may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's legal borrowing limit of $14.3 trillion and the government misses debt payments.

The deadline to raise the ceiling is on August 2.

"Today's CreditWatch placement signals our view that, owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days," the agency said in a statement.

"We have also placed our short-term rating on the U.S. on CreditWatch negative, reflecting our view that the current situation presents such significant uncertainty to the U.S.' creditworthiness," S&P said.

"Further delays in raising the debt ceiling could lead us to conclude that a default is more possible than we previously thought. If so, we could lower the long-term rating on U.S. government this month," S&P said.

U.S. Treasuries reaction was generally muted, perhaps because Moody's had already raised the possibility of a downgrade. Dealers said the market might also be hoping that the pressure from the agencies would jolt U.S. lawmakers into reaching a deal.

As a result, Treasury prices dipped only modestly, lifting 10-year yields to 2.97 percent from 2.92 percent late in New York on Thursday.

The dollar fell against the euro to a session low of $1.42 before pulling back a bit to $1.4180. Dealers said the market was wary of buying the euro ahead of the results of Europe-wide stress tests on 90 banks due later Friday which could force some to seek state aid.

"Markets won't be able to shrug this off completely," said Adrian Foster, head of financial markets research for Asia Pacific at Rabobank International in Hong Kong.

"But the United States is in a different position from other countries. This is not some fiscal reform program that they have to put in place. This is just political machinations.

"It has less of a market impact, because we're programed to think the political machine will come through at the end of the day."

So protracted has been the wrangling over the budget that S&P warned that even if there was a deal done on raising the ceiling, it might still cut the rating if it was not convinced the agreement went far enough to address medium-term debt strains.

"If an agreement is reached, but we do not believe that it likely will stabilize the U.S.' debt dynamics, we, again all other things unchanged, would expect to lower the long-term 'AAA' rating, affirm the 'A-1+' short-term rating, and assign a negative outlook on the long-term rating," said S&P.

The S&P statement showed the need for Congress to act to raise the debt limit, Jeffrey Goldstein, the U.S. Treasury's under secretary for domestic finance, said in a statement.

"Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support," he said.

(Additional reporting by Walter Brandimarte in New York and Reuters bureaus in Asia; Editing by Balazs Koranyi and Neil Fullick)