Fault lines appear as crisis worsens: Moody’s to downgrade 3 large U.S. banks

September 22, 2011 – NEW YORK –  Moody’s Investors Service lowered debt ratings for Bank of America Corp, Citigroup Inc and Wells Fargo & Co on Wednesday, saying the U.S. government is getting less comfortable with bailing out large troubled lenders. The government is “more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled,” said the rating agency, a unit of Moody’s Corp. “This is crystallizing the fact we’re in a new political reality,” said Jason Ware, equity analyst with Salt Lake City-based Albion Financial Group. Moody’s decision hit Bank of America hardest, as it downgraded the long- and short-term debt of the holding company and long-term deposits at its main banking unit. The ratings agency downgraded only short-term debt at Citigroup and limited the Wells’ cut to its senior debt and to deposits at its lead bank. Bank of America is struggling with billions of dollars of mortgage losses, litigation and stresses from the need to raise capital to meet new regulatory obligations. After Moody’s downgrade, the cost to insure $10 million of Bank of America’s debt for 5 years in the credit default swap market rose 48 basis points to $378,000 per year. But analysts and investors said the downgrade was likely to have little immediate impact on Bank of America’s business. “It certainly doesn’t look good, but operationally it shouldn’t affect them that much,” said Jon Finger, managing partner of Finger Interests Number One Ltd, a Houston-based investment firm that owns Bank of America shares. The risk of contagion from one failing bank to other banks has “become less acute,” Moody’s noted, adding the Dodd-Frank financial reform law of 2010 reduced the ties among financial institutions. When investment bank Lehman Brothers Holdings Inc failed in September 2008, its debt and counterparty obligations created shockwaves throughout the global financial system. The banks’ ratings could be cut further if pending provisions in Dodd-Frank designed to stop too-big-to-fail bailouts are fully implemented, said Sean Jones, senior vice president in Moody’s financial institutions group. Moody’s had signaled it might downgrade the three banks’ ratings in June. –Reuters

Another U.S. government shutdown looms                                  contribution Luisport