September 21, 2011
Too big to fail? Moody’s has lowered its debt ratings for Bank of America, Wells Fargo and Citigroup.
The ratings agency said today it decided to downgrade after it became apparent the government would not bailout the banking behemoths in a crisis. Moody’s attributed its decision in part on new laws under the Dodd-Frank Wall Street Reform Act, according to the Associated Press.
Bank of America fared the worst of the trifecta – Moody’s downgraded its key long-term debt ratings two notches, to Baa1 from A2. Wells Fargo & Co.’s long-term debt rating fell one notch to A2 from A1 and Citigroup Inc.’s rating remained the same at A3, although its short-term debt was downgraded.
The downgrade serves as a warning to investors that they might get taken to the cleaners if they buy debt from the banks. It will also lead to higher interest rates for the banks.
Credit default swaps increased and financial stocks tumbled on the news.
“That is so absurd I can’t believe anyone would even write it. This is the largest bank in the United States,” said Rochdale Securities analyst Dick Bove. “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 its mind.”
Following the downgrade, Bank of America said that it will now call in $940 billion in loans if it fails.
In addition, Bove noted, Bank of America “has $1.38 trillion in deposits. You think the FDIC can cover that?… The idea that the U.S. government would allow it to fail is beyond the realm of possibilities.”