Moody's Cuts Credit Rating of Bank of America, Wells Fargo

Posted by Mike Tirone - Thursday, September 22nd, 2011

Moody's Investors Service has cut the credit ratings of three major U.S. banks based on the slim chance that Washington will bail out large U.S. financial companies if another financial crisis were to come.

Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) had their long-term credit ratings downgraded by Moody's.

Citigroup Inc. (C)'s short-term rating was dropped by Moody's on Tuesday, stating “there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited.”

Bank of America's ratings were cut two levels to Baa1 from A2 for long-term senior debt and to Prime-2 from Prime-1 for short-term debt. Another cut may be ahead as the outlook for long-term senior ratings at Bank of America is quite negative.

Investor confidence continues to be low due to the dipping economy and the credit dropping moves no not just stay in the U.S. Standard & Poor's downgraded the ratings of seven Italian banks because of their holdings of low-quality sovereign debt.

"Now, having moved beyond the depths of the crisis, Moody's believes there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited," Moody's said in the report.

After the downgrades, bank stocks helped lead markets down Wednesday, with Bank of America falling 52 cents, or 7.5%, to $6.38. Wells Fargo has been among the better-performing bank stocks in recent months, and its shares fared relatively well, falling only 96 cents, or 3.9%, to $23.71, significantly less than other banks that were not downgraded.

While most are not surprised by the downgrade in credit for these banks, analyst Dick Bove of Rochdale Securities feels that Moody's downgrade is outrageous. Bove's reaction to Bank of America's credit drop was intriguing,

"That is so absurd I can't believe anyone would even write it. This is the largest bank in the United States. It has business with one out of every five households in the country. The assumption is that the United States government would allow this bank to go under and pull all of those other people under with it!... In my view, I think Moody's has lost it's mind."

Bank of America said that Moody's decision to cut its credit rating does not reflect a weakening of the bank's intrinsic credit quality. While being sure to ease their customers' minds by mentioning that Moody's stated that the company has made progress in improving its capital and liquidity positions while also having plenty of resources to absorb the additional losses expected from its mortgage business. 

Bove concluded by hypothetically stating, "If Bank of America went under, basically it has to call all the loans it has—$940 billion in loans outstanding. In addition, it has $1.38 trillion in deposits. You think the FDIC can cover that?"

 

*Indented content from LA Times

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