Bank of America Death Watch: Moody's Downgrades B of A Credit, Signals Bailouts Less Likely
The most interesting thing about the credit rating agency's decision to downgrade Bank of America, Wells Fargo, and Citigroup wasn't the downgrade in their credit rating itself: it was the signal, reported by the New York Times, that the federal government is not going to step in and save the big banks from themselves this time:
The downgrades were driven by Moody’s conclusion that the federal government was less likely to step in and provide support for a faltering big bank the way it did after the 2008 collapse of Lehman Brothers, when Washington executed a series of actions including capital infusions and credit guarantees to halt the spreading panic.
Moody’s had put the banks on notice for a possible downgrade on June 2.
While Moody’s said it “believes that the government is likely to continue to provide some level of support to systemically important financial institutions,” the agency added that the government “is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled.”
The banks are rated, Yves Smith at Naked Capitalism pointed out, not only on their own strength but the evidence that government will step in to support them should crisis fall again. And Bank of America in particular is facing plenty of trouble.
Moody's "cut Bank of America’s long-term senior debt to Baa1, three levels above junk." Though they downgraded Citigroup and Wells Fargo slightly, Bank of America has the worst rating and saw its stock plunge.
Bank of America remains troubled by lawsuits and as Smith notes, the 50-state mortgage fraud settlement talks are shaky at best, increasingly unlikely to be resolved to the banks' liking anytime soon.
But the downgrade is meant to serve as a warning to investors that they shouldn't count on the government to shore up the "too big to fail" banks next time around--as well as, of course, a warning to the bank itself to change its ways.
And Smith pointed out that depressingly, it's Republicans who are seen as more likely to let the banks die:
In some ways, this downgrade reflects the very real possibility of an Obama loss. Geithner or a like minded successor (Jamie Dimon, eek) would be particularly attentive to the pet needs of the banking industry and would continue the “No more Lehmans” policy if at all possible. But a Republican who came in with meaningful Tea Party support might well consider it a badge of honor to let a big bank fail. And we may have the opportunity to see how that plays out sooner than we’d like.