Moody’s Bank Downgrades Assailed by Analysts as ‘Too-Big-to-Fail’ Persists
Moody’s Investors Service, the ratings firm that downgraded the credit of Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC), said future U.S. bailouts of financial firms are less likely. Some analysts and investors disagree.
“We have not gotten beyond too-big-to-fail,” said Jason Brady, a managing director at Santa Fe, New Mexico-based Thornburg Investment Management Inc., who helps oversee about $76 billion. “We had an experiment where we let one go and it didn’t work out so hot. Now they are going to be more likely to let somebody go? I don’t think so.”
Brady was referring to Lehman Brothers Holdings Inc., which collapsed in 2008 and presaged a taxpayer rescue of the biggest banks to keep the financial system from collapsing. Lawmakers have since pushed through regulations including the Dodd-Frank Act aimed at cutting the interconnectedness of financial firms and establishing plans to wind down troubled companies to avoid future bailouts.
Moody’s cut the long-term credit ratings for Bank of America and Wells Fargo yesterday and said the government is “more likely now than during the financial crisis” to let a large U.S. bank collapse, according to a statement. The ratings firm said the two banks and Citigroup Inc. (C), which had its short- term rating downgraded, benefitted more than others from underlying government support.
“They need to defend this move with logic, not just, ‘This is our methodology,’” said Nancy Bush, an analyst at SNL Financial, a bank-research firm in Charlottesville, Virginia. Moody’s likely is protecting itself “in case there is another downdraft, since they were caught absolutely flat-footed in 2008 by slapping AAA on everything,” she said.
Goldman Sachs, JPMorgan
Moody’s isn’t abandoning the idea of government help, saying in its Citigroup statement that the new assumptions represent a pre-crisis level of support. The ratings of five other banks -- JPMorgan Chase & Co. (JPM), the second-biggest U.S. bank, Morgan Stanley (MS), Goldman Sachs Group Inc. (GS), State Street Corp. (STT) and Bank of New York Mellon Corp. (BK) -- also incorporate government support. These firms aren’t under review, according to Abbas Qasim, a Moody’s spokesman.
“The banks’ liquidity positions and capital positions are far stronger than they were in 2008, which was the depth of the crisis,” Sean Jones, a Moody’s vice president, said in a phone interview. That means the government is less likely to come to the rescue, he said.
Qasim didn’t respond to a follow-up e-mail seeking comment about analysts’ and investors’ reaction to the downgrades.
U.S. Representative Barney Frank, a Massachusetts Democrat and co-author of the Dodd-Frank Act, said the rating firm’s decision was right and affirmed what lawmakers had done in overhauling financial regulations last year.
‘We Got It Right’
“To the extent that they were rating the banks because they were too big to fail, they were wrong and I view this as confirmation that we got it right in our bill,” Frank, the ranking Democrat on the House Financial Services Committee, said yesterday in an interview in Washington.
Frank has criticized ratings companies for maintaining that the U.S. would aid failing firms, pointing to a lack of political will to bail out banks again, as well as powers given to regulators to seize and unwind the largest firms.
“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 yesterday.
Bank of America, the biggest U.S. lender by assets, had its ratings cut two levels to Baa1 from A2 for long-term senior debt, and to Prime-2 from Prime-1 for short-term debt, Moody’s said. The outlook for long-term senior ratings at the Charlotte, North Carolina-based lender remains negative, indicating another cut may be ahead.
Wells Fargo’s senior debt was cut one level to A2 from A1, Moody’s said in a statement. The outlook remains negative on the senior long-term ratings. New York-based Citigroup had its short-term credit ratings cut to Prime 2 from Prime 1. The ratings firm confirmed the lender’s A3 long-term rating, and the A1 long-term and Prime-1 short-term ratings of Citibank N.A., saying the bank’s stand-alone credit profile had improved.
Citigroup, the third-biggest U.S. bank, posted $29.3 billion in losses tied to subprime mortgages for 2008 and 2009 combined and took a $45 billion bailout from taxpayers, which has since been repaid. San Francisco-based Wells Fargo, the fourth-largest U.S. bank, has repaid a $25 billion bailout to the U.S., while Bank of America returned $45 billion.
Bank of America and Citigroup said in statements that they disagree with Moody’s decision, and Wells Fargo said the rating agency’s move “solely reflects a change in their assumption regarding systemic support.”
Bank of America was unprofitable in three of the four quarters ended June 30 as Chief Executive Officer Brian T. Moynihan, 51, booked more than $30 billion in charges tied to soured mortgages. The lender’s shares dropped 52 percent this year through yesterday as Moynihan settled disputes over defective loans.
“Bank of America is a much bigger deal than Lehman Brothers; just the symbolism alone,” Brady said. For Moody’s to say there’s a lower probability of a bailout “ignores the fact that they are much, much bigger on Main Street. There’s no way the government would let them fail.”