A downgrade of United States' top-tier credit rating has Wall Street scrambling to figure out the knock-on effects for the financial system, from mortgages to banks to markets that rely on U.S. Treasuries for collateral.
The immediate effects of the Standard & Poor's downgrade of the country's AAA credit rating late on Friday are likely to be modest, largely because it was expected and already at least partly discounted, experts said.

Many downplayed the likelihood of the sort of financial contagion experienced when Lehman Brothers went under in September 2008. Few had expected it to have to file for bankruptcy, and few were prepared for the fallout. Money market funds froze, some major commercial banks collapsed, and many major dealers and finance houses teetered on the edge of failure.

But even if that type of scenario is unlikely this time, bankers, lawyers and investors wonder if there could be longer-term consequences of S&P's downgrade, given that U.S. sovereign credit is bedrock to the world financial system.

The analysis is complicated because so many of the potential stress points for the financial system are relatively opaque areas like over-the-counter derivatives markets.

Adding to the difficulties is the concern that the downgrade is only one of the many issues roiling global markets. The European debt crisis is spreading, with Italy and Spain coming under the gun after Greece, and data in recent weeks point to a weaker U.S. economy than many investors had thought and have led to fears of another recession.

"I actually think it is going to end up having more of an impact than some of the news stories are suggesting," said Thomas Stoddard, a senior managing director at Blackstone Group who focuses on financial services investment banking.

"Not having the U.S. as triple-A is just going to pop up in more places and have more frictional costs than people might suspect," Stoddard added.

A number of entities that are key players in the U.S. financial system -- including mortgage finance companies Fannie Mae and Freddie Mac, and securities clearinghouses like the Options Clearing Corp Depository Trust Co -- are likely to be downgraded by Standard & Poor's on Monday.

For Fannie Mae and Freddie Mac, losing their triple-A rating could lift borrowing costs, potentially making mortgages more expensive for consumers and adding to stress in the already unstable U.S. housing market.

Last month, S&P said it may also cut ratings for companies like the Depository Trust Co, which facilitates payment transfers among major banks, and several Federal Home Loan Banks and Farm Credit System Banks.

On Friday evening, when S&P cut the United States' sovereign rating by one notch to "AA-plus," it said it would offer more detail about the ratings for these companies on Monday.

DERIVATIVES MARKETS

Another source of potential stress is derivatives markets, where investors and banks often collateralize their positions using U.S. Treasuries.

If banks start demanding more Treasuries to collateralize the same exposure, investors could be forced to sell assets to come up with extra collateral, causing broader market declines. As long as Treasury yields are at all time lows, that risk seems relatively low, said a hedge fund trader who spoke on condition of anonymity.

Some derivatives transactions may have ratings triggers built into them that unwind the deals if the U.S. is downgraded, the trader said, but he said it is difficult to know how many such transactions are out there.

OCC, the world's largest equity derivatives clearing organization, said on Sunday it has no current plans to adjust its current valuations or haircuts on Treasuries used as collateral.

There are some factors working in markets' favor, analysts noted.

For one thing, major U.S. banks are better capitalized as credit losses have slowed. The U.S. banking system had $1.51 trillion of equity capital at the end of the first quarter, compared with $1.29 trillion in the fourth quarter of 2008. That roughly 17 percent of extra capital is supporting about 3 percent fewer assets than it used to.

If stresses become strong in areas like the repo market, a massive market that banks use to fund securities short-term, dealers are fairly sure the Federal Reserve can jump in to offer support, as it did during the credit crunch, the trader said.

Any impact in the derivatives market will be less than what the pessimists fear, said Michael Holland, founder of asset manager Holland & Co. "I don't expect major disruptions in markets just from the downgrade."

BORROWING COSTS

Borrowing costs for companies with top ratings like Microsoft Corp and Exxon Mobil Corp could drop, because triple-A rated debt may be even more attractive to some investors now, analysts said. Some companies have at times had more available cash on their balance sheets than the U.S. government in recent weeks.

In general, corporate borrowing costs may not rise following the U.S. downgrade. Last week, when many in the market were expecting the U.S. to be downgraded, six U.S. companies issued 30-year bonds, which is unusually long-dated for the corporate market.

Even highly-rated corporate bonds have seen their risk premiums rise in recent sessions, signaling that portfolio managers are still concerned about credit risk. As turmoil in Europe ratchets higher, those risk premiums may rise more. But investors' willingness to buy long-term corporate debt signals some confidence in the sector.

"To a certain extent, corporate debt may look even more attractive, especially cash-rich balance sheet companies with lots of liquidity," said Chip MacDonald, a financial services partner at law firm Jones Day.

STATE FINANCES

States that rely heavily on federal government spending -- such as Virginia and Maryland, which are home to many federal employees and defense contractors -- could suffer if Congress and President Barack Obama slice the federal budget more deeply.

A downgrade of Fannie Mae and Freddie Mac would affect billions of dollars of debt issued by public housing authorities secured by federally guaranteed mortgages.

Hospital credits could be weakened if the federal government slashes programs such as Medicaid -- the health plan for the elderly, poor and disabled that accounts for as much as 30 percent of state spending. Stocks in the health care sector sold off last week, amid fears of declining government support for spending in the sector.

"The degree of dependence on the federal government now becomes a state credit issue," said Philip Fischer a managing principal at eBooleant Consulting, in a recent report.

S&P is also expected to immediately downgrade pre-refunded bonds. When municipal bonds are refunded, investors are typically repaid from Treasuries held in escrow.

Debt issued by AAA-rated universities and colleges with global reputations might rise in price, said Evan Rourke, a portfolio manager, with Eaton Vance, citing Harvard and Princeton as examples.

Indeed, the immediate impact of the downgrade might be muted by the tax-free market's traditional strengths.

"I don't see a tremendous flight out of municipals. You might see credit spreads widening for lower-rated issues but we also think a lot will hold their ratings," Rourke said.

U.S. officials are preparing insider trading charges against a host of financial players, including investment bankers and hedge funThe charges could surpass any previous investigations on Wall Street, and examine whether certain players garnered tens of millions of dollars in illegal profits, the newspaper said in its Saturday edition.

The investigations could expose "a culture of pervasive insider trading in U.S. financial markets", especially in ways private information is transmitted to traders through connected insiders, the newspaper said, citing federal authorities.

Wall Street has been abuzz for weeks about federal authorities filing another big insider trading case that might compare to last year's Galleon case.

Two lawyers speaking to Reuters, who declined to be identified because they represent potential clients, said agents from the FBI had approached hedge fund traders over the past two weeks and a number of traders had contacted lawyers.

While the scope of the investigation is unclear it is said to focus on the use of so-called expert network firms, businesses that command big fees from hedge funds to match them up with experts in particular industries. There has been concern for years that some experts may be passing on confidential information about public companies to traders.

A year ago, shortly after the Galleon case broke, the Philadelphia office of the U.S. Securities and Exchange Commission sent out two dozen subpoenas to hedge funds and other traders, seeking information about their trading in a number of health-care related buyouts. The SEC's Philadelphia office is ground central for the agency's new task force that is cracking down on insider trading.

The Wall Street Journal report of the investigation nearing an end comes a few weeks after federal authorities charged a French doctor with passing on confidential information to a portfolio manager at FrontPoint Partners health care hedge fund.

FrontPoint has not been charged.

Authorities are also investigating Merck & Co's takeover of Schering-Plough and AstraZeneca's takeover of Medlmmune, according to The Wall Street Journal.d managers, The Wall Street Journal said, citing people familiar with the matter.

Irish borrowing costs shot up to new lifetime highs on Thursday and European Commission President Jose Manuel Barroso signaled the bloc was ready to act should the humbled former "Celtic Tiger" require a rescue.European officials said they were monitoring developments in Ireland closely, with the Handelsblatt newspaper quoting a German government source as saying aid could be unlocked "very quickly" if needed.

Ireland's fragile government is battling to prove it does not need a Greek-style rescue to help it reduce the worst budget deficit in Europe, but markets are skeptical about its ability to pass the first of four austerity budgets next month.

Compounding the pressure on Ireland and other euro zone countries like Portugal have been European plans to create a permanent rescue mechanism under which private debt holders would help shoulder the cost of future euro zone bailouts.

Although Germany has made clear the new mechanism would not apply to existing debt, the plan has spooked markets, raising fears of a domino-effect on peripheral euro members that only weeks ago appeared to have weathered the worst crisis in the single currency's bloc's 11-year history.

"What is important to know is that we have all the essential instruments in place in the European Union and euro zone to act if necessary, but I am not going to make any speculation," Barroso said at a G20 summit in Seoul, when asked whether Brussels would need to act to support Ireland.

Irish bank shares were down sharply on Wednesday, reflecting renewed jitters about their exposure to the country's wrecked property market, with Allied Irish Banks shedding 5.6 percent and Bank of Ireland off 8.9 percent.

UK banks with a large exposure to Ireland, including Royal Bank of Scotland, also slid.

The cost of insuring Irish, Portuguese and Spanish debt against default pushed up to record highs as well, and the spread between Irish 10-year bond yields and those of German benchmarks rose above 680 basis points, hitting a new high for the ninth straight session.

"It's the same trend we've been seeing," said Gavan Nolan, an analyst at Markit. "The market is very nervy."

NO CALL FOR AID

Irish, European Union and International Monetary Fund officials all said on Wednesday that Dublin had not requested financial aid under a new rescue mechanism known as the European Financial Stability Facility (EFSF), which the bloc set up in May to stem contagion from Greece's meltdown.

The Irish government is fully funded until mid-2011, meaning a liquidity crisis like the one that shocked Greece earlier in the year is not imminent.

The IMF has said markets are overestimating the risks of default in a number of countries. A recent report said that of the 36 instances in the last two decades where a country's yield spreads rose above 1,000 basis points, only seven resulted in default.

In the other 29 cases, spreads eventually fell back with no default.

But most analysts seem to agree that Ireland could be forced to seek a rescue if its borrowing costs do not stabilize soon. With liquidity in the bond market drying up, some are now openly speculating the country may also have to restructure its debt, particularly if its banks suffer more losses.

Prime Minister Brian Cowen's unpopular government has pledged to outline a four-year plan later this month to bring the ballooning budget deficit under control, and to push through 6 billion euros in savings in the 2011 budget on December 7.

However, with a parliamentary by-election due which is likely to cut the government's majority to just two seats, analysts increasingly say only an early general election that produces a new government with a stronger popular mandate to implement painful spending cuts and tax rises may convince investors that Ireland is able to overcome its debt crisis.

Should Ireland fall, concerns about Portugal and probably Spain could rise, creating a vicious spiral that could drag the euro zone into another deep crisis with global implications.

President Barack Obama on Saturday renewed his pitch for final congressional passage of a U.S. healthcare overhaul and promised Americans they will begin reaping the benefits soon after he signs a bill into law.As Obama's fellow Democrats in the House of Representatives and the Senate struggle to merge their healthcare bills into one, the president used his weekly radio address to try to ease lingering public doubts over his top legislative priority.
The president stepped back into the center of the healthcare debate after being preoccupied for much of his first week back from vacation in Hawaii with fallout over the attempted Christmas Day bombing of a U.S. airliner.
"We are on the verge of passing health insurance reform that will finally offer Americans the security of knowing they'll have quality, affordable health care whether they lose their job, change jobs, move or get sick," he said.
Latching onto widespread public resentment against big insurers, Obama promised, "The worst practices of the insurance industry will be banned forever."
While acknowledging it will take a few years to fully implement the reforms, Obama insisted, "What every American should know is that once I sign health insurance reform into law, there are dozens of protections and benefits that will take effect this year."
He said the more immediate changes would include enabling uninsured Americans with pre-existing medical conditions to purchase affordable coverage, prohibiting insurance companies from imposing lifetime and annual limits on care and giving small businesses tax credits to buy coverage for employees.
TOUGH NEGOTIATIONS
The healthcare overhaul would lead to the biggest changes in the $2.5 trillion U.S. healthcare system in four decades. Both bills would extend insurance coverage to more than 30 million uninsured Americans and create exchanges where individuals can shop for insurance plans.
But Democrats who control Congress face tough negotiations to reconcile House and Senate bills, which differ on issues including taxes, abortion and whether to have a government-run insurance plan. The measures must be melded together and passed again by each chamber before being sent to Obama.
Democrats want to deliver a major legislative victory for Obama and sell the public on what they believe are the benefits of reform, well before they have to fight to preserve their majorities in Congress in November midterm elections.
Republicans solidly oppose Obama's healthcare approach, calling it a government takeover of the system and too costly, and have threatened new procedural roadblocks in the Senate. Democrats have shut them out of the closed-door negotiations.
U.S. healthcare spending would rise by $222 billion over the next decade under the Senate's overhaul bill, the U.S. agency that oversees Medicare said in a report released on Friday.
The report, written by Richard Foster, the chief actuary at the Centers for Medicare and Medicaid Services, is the latest from the agency casting doubt on savings claims from healthcare reform.
The increased spending would primarily come from the expected influx of newly insured individuals seeking medical care, the report said. More than half of them would receive Medicaid, the report said, creating a demand level that would likely be difficult to meet over the first few years.
But Foster acknowledged that his analysis is "subject to much greater uncertainty than normal" as there is little precedence for the sweeping change in how insurance is provided and paid for under the proposed legislation.
Obama met Democratic leaders during the past week to try to push the process along. He will host labor leaders at the White House on Monday in a bid to ease their concerns.

R&B singer Beyonce led the field of Grammy contenders with 10 nominations, followed by teen country sensation Taylor Swift with eight, organizers of the music industry's top awards said on Wednesday.Black Eyed Peas, R&B singer Maxwell and rapper Kanye West each had six nominations, with Lady Gaga and rapper Jay-Z getting five apiece.
Swift, 19, whose "Fearless" album is the biggest seller in the United States in 2009, will compete with Beyonce for the coveted album of the year Grammy, along with Lady Gaga, Black Eyed Peas and the Dave Matthews Band.
Winners in all categories of the 52nd annual event will be announced at a televised awards ceremony on Jan 31.