Moody's Puts BofA, Wells Fargo And Citi On Downgrade Review: Cites Risk Of No Government Support, Mortgage Exposure As Risks

Tyler Durden's picture

Moody's Investors Service has placed the deposit, senior debt, and senior subordinated debt ratings of Bank of America Corporation (A2 senior), Citigroup Inc. (A3 senior), Wells Fargo & Company (A1 senior), and their subsidiaries on review for possible downgrade. Each of these ratings currently incorporates an unusual amount of "uplift" from Moody's systemic support assumptions that were increased during the financial crisis. The review will focus on whether these ratings should be adjusted to remove this unusual uplift and include only pre-crisis levels of government support. At the same time, Moody's said that it will assess improvements in Bank of America's and Citigroup's standalone financial strength, and that this may temper the extent of any ratings downgrades that could result from its review of these firms' unusual level of systemic support.
Moody's also placed the Prime-1 ratings of Bank of America's and Citigroup's holding companies on review for possible downgrade. The Prime-1 rating of Wells Fargo's holding company, Wells Fargo & Company, was affirmed. Moody's also affirmed the Prime-1 ratings of all three companies' banking operations, including the Prime-1 ratings of Bank of America, N.A., Citibank, N.A., and Wells Fargo Bank N.A.
These actions had no impact on the FDIC-guaranteed debt issued by these firms, which remain at Aaa with a stable outlook.
Regulatory authorities continue to make progress in rulemaking, however, the final shape of the landscape remains uncertain. Today's rating actions reflect Moody's view that, in light of developments on the Dodd-Frank Act that have occurred to date, the unusual levels of uplift incorporated into the ratings of Bank of America, Citigroup, Wells Fargo may no longer be appropriate.
"The US government's intent under Dodd-Frank is very clear," says Senior Vice President Sean Jones. "Going forward, it does not want to bail out even large, systemically important banking groups." Mr. Jones notes however that Moody's continues to believe that such a group could not be resolved without risking a disorderly disruption of the marketplace and the broader economy. "Even so, the support assumptions built into these three banks' ratings are unusually high, which may no longer be appropriate in the evolving post-crisis environment," added Jones.
Moody's also continues to evaluate whether it should reduce to below even pre-crisis levels its support assumptions for the eight US banks that currently benefit from ratings uplift. In this context, the rating outlook on the deposit, senior debt, and senior subordinated debt ratings of Bank of New York Mellon has been changed to negative from stable. This brings its outlook into line with that of the other US banking groups whose debt and deposit ratings benefit from government support assumptions: JPMorgan Chase & Co, The Goldman Sachs Group, Inc., Morgan Stanley, and State Street Corporation.
Unlike the three institutions placed on review today, the support assumptions incorporated into these five groups' ratings are not unusual -- they remain similar to, not higher than, what they were before the crisis. Although Moody's considers it unlikely that it will withdraw all government support from the ratings of these eight banking groups, the agency will continue to evaluate the amount of uplift derived from support assumptions as regulators write and promulgate rules and regulations that could increase their ability to resolve these institutions without triggering contagion and broader systemic risk.

Given these potential developments, over time this could lead to Moody's reducing its support assumptions for these eight firms to below even pre-crisis levels.
Moody's government support assumptions for Bank of America, Citigroup, and Wells Fargo are higher than what similarly rated institutions would have received prior to the crisis. For example, Bank of America N.A.'s and Citibank N.A.'s C- (C minus) unsupported BFSRs translate to a Baa2 rating on Moody's long-term debt scale; prior to the crisis a similarly rated, systemically important bank would typically have benefited from no more than three notches of uplift, meaning its ratings would be no higher than A2. Currently, Bank of America receives five and Citibank four notches of uplift from government support assumptions, bringing their senior ratings to Aa3 and A1, respectively. Wells Fargo's unsupported BFSR of C+ (C plus) translates to an A2 rating on Moody's long-term debt scale; prior to the crisis a similarly rated, systemically important bank would typically have received no more than two notches of uplift, to Aa3.
Currently, Wells Fargo's Aa2 senior rating benefits from three notches of uplift.
Moody's has affirmed the C- (C minus) standalone bank financial strength rating (BFSR) of each of Bank of America and Citigroup, and affirmed the C+ (C plus) BFSR of Wells Fargo. However, Moody's will consider whether there has been sufficient improvement in Bank of America's and Citigroup's financial strengths to warrant increasing their Baa2 Baseline Credit Assessments (BCAs) to Baa1. Consequently, certain of their hybrid securities were placed under review for possible upgrade. These ratings do not incorporate any systemic support uplift, so the review of their ratings will be focused on the assessment of these firms' standalone financial strength. In addition, to the extent that the BCAs are increased, this would temper the size of the potential downgrades to Bank of America's and Citigroup's debt and deposit ratings.
During its assessment of Bank of America's and Citigroup's BCAs, Moody's will evaluate each bank's progress in improving its risk profile. Each of these banks have increased their equity through internal capital generation, and most of their asset quality indicators have improved. In addition, the costs related to repurchasing mortgages sold to third parties due to breaches in representations and warranties have stabilized at relatively modest levels for Citigroup, though Bank of America continues to experience a high level of repurchase costs, but has entered into settlements with the GSEs and Assured Guaranty that reduce its potential exposure to higher losses under a stress scenario.
Despite this progress, these banks still have sizable residential mortgage exposures; their credit costs could therefore spike if the US economy were to contract again. Further, they continue to face litigation costs related to faulty foreclosure practices.
"Other considerations will include the potential effectiveness of changes in risk management at Bank of America and Citigroup, given their poor performance during the credit crisis and their still sizable capital market activities, which we view as both opaque and volatile," Jones says, "while ongoing capital plans will also be important in our assessment."

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SheepDog-One's picture

I thought this was confirmed to be absolutely impossible after 'Man of the Year' SAVED us all. Banks totaly healthy, economy confirmed recovered, prosperity far and wide across the fruited plain....all is WELL! 

People believe we'll just keep printing to infinity and its all good...I see a huge kick in the nuts coming suddenly.

weinerdog43's picture

I read stuff like this and get this sick feeling in my gut.  One does the best they within your means, avoid most debt, try to save a little something, keep some metals, etc...  Unfortunately, no one knows when this is all going to blow up and what the best roadmap for survival is going to be. 

Sometimes, I really wonder if I would have been better off HELOCing the heck out of my house, bank it in silver/gold and then walk away.  Stupid me I suppose for paying my debt.

Dolemite's picture

Man of the year hahaha laugh every time I read that....

Risk off btw?

Seasmoke's picture

i hardly ever hear it mentioned, but the banks HELOC loans are as good as worthless and i do not see anyway out for them

A_MacLaren's picture

Taxpayers to the rescue?

Fed Buys Bankster crap, uses US Trashury Notes and Bills for income to offset the losses from the crap HELOCs it now owns.  Losses transfered to the taxpayers as even less seniorage and excess of income over Fed oper expenses is remit back to the Treasury.

MachoMan's picture

Actually, depending on how screwed up the paper work is on the first mortgage, second mortgages might actually be able to be enforced.

Madcow's picture

As time goes on, wages and incomes will fall as the economy stagnates – while the purchasing power of wages and incomes falls steadily.  That’s not “hyperinflation.”  More like “hyper-bankruptcy”

Life of Illusion's picture


You mean they won’t get any more funds to support country wide toxic assets!

Will they finally be forced to mark to market housing inventory?

Liquidate the inventory, clear the system. They managed to cluster fuck it enough, time to move on.

Force liquidation, If not expect a slow long term inflated no growth economy with asset prices overvalued. Reset, Restructure!


NotApplicable's picture

I'm hoping for the "hold their breath" trick.

NotApplicable's picture

TBTF at risk?


Caviar Emptor's picture

QE3 or whatever else they might call it is on the way for final signatures. Fisher talked about it just this AM

MachoMan's picture

I think they're too scared to let the markets fall sufficiently/let the dollar appreciate significantly to have the downturn be successful at repriming their methods and help reset diminishing returns...  Obviously they can't keep it up in perpetuity, but still...

Stoploss's picture

LOL!! Gov't support now seen as risk. Downgrades based on lack of monetization all but ensures QE 3. Banks jumped the shark, and turned the tide. Gold is turning into Johnny Holmes, that shit just won't go down.

staks's picture

Shot over the bow... with a water pistol

firstdivision's picture

This was released just to drive down financials (which in turn drives down all markets).  It is in the banks interest to have QE3 offically announced.  They are addicted to free money.

Problem Is's picture

Yup... 2010 pre-QE2 replay... We keep falling for the same sucker play... they keep calling it out of the same play book...

NotApplicable's picture

Who is this "we" that is being suckered.

This is an outright power-play beyond our control. We might be victims, but it's hard to consider anyone a sucker when there's gun-backed enforcement of legal institutional machinations where no one individual is responsible for the outcome.

In this scheme, the only suckers are the voters who insist upon supporting such a violent system in the (false) hope that once they can get their version of a benevolent dictator installed, everything will be better. Well, that obviously ain't gonna happen, as evidenced by every US Pres. since JKF last made the attempt.

Wall St. owns the apparatus of power. Other than participation in the polarized, divide and conquer special interest groups (feel-good destructivism), "we" have little say in the matter.

hamurobby's picture

Im having a GREAT morning.

fuu's picture

Well thanks Captain Obvious!

augie's picture

wasn't robo'nuts telling us to buy bank stocks the other day? I'm gonna start fading his advice.

SheepDog-One's picture

RainbowTrader is the ultimate fade signal. Whatever he mentions within 24 hours plummets.

cxl9's picture

These actions had no impact on the FDIC-guaranteed debt issued by these firms, which remain at Aaa with a stable outlook.

Ah, good. So the printing presses still work, then.

jkruffin's picture

Wow, an insolvent bunch of banks, who coulda thunk it?

NotApplicable's picture

Technically, either they all are, or all aren't, depending on how one views their privileged legal operating status.

It's a repeat of the Emperor's New Clothes. A bank is solvent only because Sheila says so.

staks's picture

Seee - Seee. See what will happen if you take your support away Mr B. They can not stand on their own - they are handicapped and will not survive without constant spoon feeding.

Careless Whisper's picture

A Moody's downgrade of entities that are failing because they sold products based on Moody's ratings. That hurts my brain.

chunga's picture

I'd like to know who rates Moody's. They should have downgraded themselves a long time ago.

Problem Is's picture

Everybody but JPM... funny how that works, aye Jamie??

FreeNewEnergy's picture

BAC approaching the Nov. 30 low (closing) of 10.92. Break that and it's a straight shot back to 6 and the closing low of 3.12 (March 6, 2009).

BAC has been quite the underperformer for nearly three years running. Wondering why this entity is still in business as one enterprise. Breakup value probably exceeds current market cap... oh, those mortgage defaults and related legal costs? Spin that off into a "bad bank" and take it straight to bankruptcy court. That would solve almost a third of the entire banking sector's problems.

Cut the big mole right off the face of banking and banish it to Hades forever. More than enough time and money has been spent trying to salvage BofA. It's now to to recognize the losses and move on "for the good of the country."

BofA thought they made a smart deal buying Countrywide for pennies, but did not do their due diligence. Either that or they were forced to take it over by the Fed, fearing systemic collapse.

It's pretty clear that CW has destroyed the better parts of BAC and should be spun out, hung out, sold off or just plain deposited in the nearest black hole.

FreeNewEnergy's picture

Haven't looked at such things in about two years, but there is pretty large open interest in BAC 10 and 11 puts for July and August.

The shape of things to come?

Electric Head's picture

"The U.S. Governments intention under Frank-Dodd is very clear...Going forward, It does not want to bail out even large, systemically important banking groups."

Yeah, Right! Is their even the beginings of a plan to let these important failed banking instituitions be desolved through the public court system?!

nathan1234's picture

An insolvent set of banks, insolvent countries and what is happening?

Gold and Silver being hammered down when they should be zooming up.

I guess when crooks run the system nothing works the way it should.


bpoint's picture

I just got a letter from Fannie Mae saying they bought my mortgage from BofA.  I love some of the language they used in the letter.  "Fannie Mae is a shareholder owned company with a public mission.  We do not make mortgage loans but instead provide funds to lenders by purchasing the mortgage loans they make." 

This last bit was what I liked the most..."The transfer of ownership of your mortgage loan to Fannie Mae has not been publicly recorded." 


zaknick's picture

Big Sis Napolitano will rescue you!!!