So-called GSEs enjoy implicit government guarantees and could cause the U.S. to lose its sterling triple-A rating if the government were forced to come to their rescue.
"Even though...credit damage from GSEs is unlikely, the greater risk to the U.S. lies with them than with broker-dealers," the S&P report noted.
The demise of Bear Stearns Cos. and the Federal Reserve's efforts to alleviate strains at broker dealers has captured the attention of market participants who feared the financial system itself might seize up last month.
While this credit crunch has hurt financial markets, S&P notes that it hasn't threatened the standing of the nation's credit quality upon which U.S. Treasury and debt priced off this government debt depend. But should a protracted recession cause Fannie and Freddie to buckle, the U.S. rating would be in danger.
The cost to the U.S. government in such a scenario would be as much as 10% of gross domestic product. The maximum potential cost of aiding the broker dealers during a prolonged economic downturn would be below 3%, S&P analysts found. The Federal Reserve's bailout of Bear Stearns and its extension of credit facilities to brokers so far costs less than 1% of GDP.
Freddie and Fannie's exposure to the housing market heightens the risk of future losses should borrowers run into trouble as home prices decline. That the two companies are guaranteeing larger loans as part of the government's efforts to shore up the housing market adds to this risk. S&P says, "These potential risks are not a prediction, but a risk worth monitoring."