Bloomberg is reporting today that Moody's has lowered its credit ratings for both Bank of America and Well's Fargo debt.
On BofA: "The government is “more likely now than during the
financial crisis to allow a large bank to fail should it become
financially troubled, as the risks of contagion become less
acute,” Moody’s analysts wrote in a report today on the
Charlotte, North Carolina-based lender.
The ratings were cut to Baa1 from A2 for long-term senior
debt and to Prime-2 from Prime-1 for short-term debt. The
outlook on long-term senior ratings remains negative."
On WF: "Moody’s downgraded the long-term ratings of the holding
company’s senior debt to A2 from A1, according to a statement
today. The outlook remains negative on the senior long-term
ratings, indicating another cut may be ahead for the San
There was also a Citigroup rating review at Moody's released today. Here is Moody's comment: "Moody's Investors Service confirmed the A3 long-term rating
of Citigroup and the A1 long-term and Prime-1 short-term
ratings of Citibank N.A. At the same time, Moody's
downgraded the short-term rating of Citigroup (the holding company)
to Prime-2 from Prime-1. The actions conclude a review
for possible downgrade announced on June 2, 2011. The outlook
on the long-term senior ratings remains negative."
All of these banks have seen their 'too big to fail' status enable them to take on excessive risk and transfer their losses to taxpayers, while also shielding bondholders and preventing shareholders from appropriate losses. The low credit ratings issued by Moody's is, they said, a reflection of "a decrease in
the probability that the US government would support the bank, if
Moody's further explains that "Moody's continues to see the probability of support for highly interconnected,
systemically important institutions in the United States to be very high,
although that probability is lower than it was during the financial crisis.
During the crisis, the risk of contagion to the US and global financial
system from a major bank failure was viewed as too great to allow such
a failure to occur -- a view borne out in the aftermath of the Lehman
failure. This led the government to extend an unusual level of
support to weakened financial institutions and Moody's to incorporate
the expectations of such support in its ratings. 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."
I personally believe that there is a political story behind this move. Maybe there is now a degree of separation between the interconnected banks that would retard a spread of a crisis within the banking system. The level of concern about this possibility is still so high globally that, IMHO, it seems silly to place confidence in the existence of any new protection from a bank/credit crisis.