Receiving Wide Coverage ...

Downgrade Reaction: Saying the budget deal didn't do enough to fix America's finances, Standard & Poor's Friday dropped the U.S. debt rating to AA-plus from AAA. Perhaps more ominous, the agency said a further downgrade is possible. Included in the reaction, Standard & Poor's and other ratings agencies "have never given us any reason to take their judgments about national solvency seriously," columnist Paul Krugman writes in the Times. Even though S&P made a $2 trillion error in calculations in the press release it sent to the U.S. Treasury for preliminary approval, S&P downgraded U.S. government debt anyway. The Journal said, "The rating cut by S&P on long-term U.S. debt threatened to upend one of the fundamental underpinnings of the financial markets going back decades: The risks and pricing of practically every major investment have been measured against the idea that U.S.-government debt was risk free.'" The Post, meanwhile, reported that Treasury Secretary Timothy Geithner and Federal Reserve Board Chairman Ben Bernanke had a conference call Sunday night with other economic leaders about how they would respond to the S&P downgrade. Another Journal story dealt with the downgrade's impact on the mortgage market. Still another article says that despite the downgrade, Treasuries will remain the safe haven for investors. Meanwhile "Heard on The Street" said the rating action could be a positive if it spurs "new urgency to tackle deficits and thorny economic issues."

Geithner to Stay: Treasury Secretary Timothy Geithner told Obama Friday that he would continue as secretary longer than expected, until fall 2012, through the elections. Cause things got kind of busy. Wall Street Journal, New York Times, Washington Post

ECB Expands Debt Purchases: Interest rates on Spanish and Italian bonds fell Monday and European bank stocks rose. The moves came as the European Central Bank expanded purchases of government debt. The ECB announced its plans during a late Sunday emergency conference call. The Journal said, "A decision to buy Italian and Spanish bonds is tantamount to conceding that the euro's member states are unable or unwilling to respond effectively, turning the ECB into the lead firefighter — and the euro zone's lender of last resort. That could reshape the future of Europe's monetary union."

AIG Seeks MBS Money: Insurance giant American International Group will sue Bank of America for $10 billion tied to mortgage-backed securities. AIG may file similar suits against Goldman Sachs, JPMorgan Chase and Deutsche Bank. Asked about the offending mortgage-backed securities, a B of A spokesperson said they were robust enough for sophisticated investors, the Times reported. Separately, the Journal reported derivatives-trading, which nearly doomed the insurer is now bringing in profit. Wall Street Journal, New York Times

Wall Street Journal

Three investigations of possible criminal activity in the mortgage market are going nowhere fast and may be doomed unless new evidence surfaces. The U.S. Attorney's office in Seattle announced Friday that it was closing its probe of Washington Mutual, and no charges will be filed. While the investigations into IndyMac Bancorp and New Century Financial Corp. remain open, but reportedly have stalled.

Wells Fargo agreed to settle claims with investors in Wachovia securities related to subprime mortgages. Wells Fargo would pay $590 million and Wachovia's auditor at the time, KPMG LLP, would pay an additional $37 million under terms of the deal, which needs court approval.

Previewing the Fed's meeting this week, the paper said it is unlikely QE3 will be launched anytime soon, unless the Fed confirms that inflation is slowing.

New York Times

A type of financing in which borrowers exchange variable-rate debt for fixed-rate obligations has been lucrative for banks, but not such a great deal for the municipal and county governments who entered the deals, writes columnist Grtechen Morgenson. These interest-rate swaps have generated significant fee income for banks, and also let banks book immediately the entire amount earned over the life of the swap. But the swaps put banks in the position of being in direct conflict with their customers.

A second recession would be disastrous because the U.S. has not yet recovered from the first recession, economists said. But the billions of dollars in cash that corporations hold could act as a buffer against layoffs, if a second recession were to happen.

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