Moody's Warns Of Upcoming Bank Downgrades If Dodd Bill Passes, BofA, Citi And Wells At Greatest Risk

Tyler Durden's picture

Moody's says that if the Dodd bill passes in the substantially proposed form, the rating agency will likely need to cut various banks due to the elimination of assumptions about systemic support as some from a resolution authority is introduced. The banks that would suffer the most are: Bank of America- 4 notches from the current HoldCo Sr rating of A2,  Citigroup and Wells Fargo both at 3, from A3 and A1, respectively, Morgan Stanley two notches lower from A2, and one notch for each of the following: BoNY (Aa2), JPM (Aa3), Goldman (A1), SunTrust (Baa1), and Regions Financial (Baa3).

As Moody's notes:

Broadly speaking, our response to the Dodd Bill is similar to our response to the Frank Bill. Senator Dodd’s proposal could lead to higher capital requirements, better liquidity, less concentrations and curtailment of risky activities -- all positives for U.S. banks’ unsupported Bank Financial Strength Ratings (BFSRs). Unlike the Frank Bill, however, the Dodd Bill mandates that more derivative trades be done through exchanges, allowing customers to observe market pricing. Although such an arrangement promotes systemic stability, the greater degree of transparency will likely lead to lower spread margins in a product that is a sizable contributor to investment bank earnings for a select few U.S. banks.

For debt and deposit ratings, however, the Dodd Bill seeks to end “too-big-to-fail” by creating a legal framework that could allow for the resolution of a failing large bank holding company (as well as a large insurance company, securities firm, or other financial company). The legislation’s objective is to resolve such a company without cost to taxpayers, but also with less disruption to the markets and the economy than would likely be the case if such a firm was subject to traditional bankruptcy proceedings. However, the market, particularly given the complexity and interconnectedness of the banks that are the target of this bill, does not isolate concern within a single institution. Therefore, the practical concern of risk contagion by investors will present practical barriers to the ability of the regulators to withhold support while also maintaining market stability that is fundamental to the health of the economy.

A key component of the Dodd Bill is that it attempts to keep the systemically important functions of the company viable and in operation while exposing unsecured creditors of the failed company to losses in accordance with their priority of claim. To the extent that such resolution authority were enacted into law, and to the further extent that we found it to be credible and likely to be used, we would need to reevaluate our systemic support assumptions that currently provide lift to the deposit and debt ratings for a number of U.S. banking companies (as highlighted in the following table).

Full Moody's report.

 

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SV's picture

File this in the "I'll believe it when I see it" bin.

Rainman's picture

...haha....it should be filed right next to that " BB confirmation in trouble "

jmf's picture

Moin from Germany,

 

just in time for the usually just in time call from Dick Bove......

"He figures Citi is worth about $8.50 in that outlook"

http://blogs.barrons.com/stockstowatchtoday/2010/03/22/citi-bove-raises-to-buy-citicorp-is-new-model-for-us-banks/

$ 8.5 would equal a marketcap of $250 billion.....

More than tripple the value of any single stock in the German DAX.......

& Cramers "Bank Stock Shortage Call" from last week....

http://immobilienblasen.blogspot.com/2010/03/cramers-bull-case-for-banks-i-can-smell.html

PURE COMEDY!

 

 

 

BlackBeard's picture

blah blah blah. short moody's.

Hondo's picture

So what they are telling us is what we already know....that the banks without the government supplying them with ready cash to pay bonuses are basically broke.........I think this is a great opportunity to let them go under and be absorbed by stronger entities......and get off my wallet.

Cognitive Dissonance's picture

"Unlike the Frank Bill, however, the Dodd Bill mandates that more derivative trades be done through exchanges, allowing customers to observe market pricing. Although such an arrangement promotes systemic stability, the greater degree of transparency will likely lead to lower spread margins in a product that is a sizable contributor to investment bank earnings for a select few U.S. banks."

It doesn't get any clearer than this. It's either do something to enhance systemic stability and a greater degree of transparency, which is good for the economy as a whole and you and I in particular, or don't do this and increase bank profits.

No contest. Bank profits is first and foremost on my mind. And you as well if you don't wish to find some poor banker in the unemployment line elbowing his way ahead of you. For your sake, you better hope Congress is thinking bank profits or you might have more competition at the soup kitchen. As if it's not bad enough already fighting with the little old lady for the stale bread crust. Now you gotta wrestle for sleeping space with some banker with a bad comb over and a $5,000 suit?

Postal's picture

Well, at least our health-care problems are solved... [/sarcasm]

Problem Is's picture

"...some poor banker in the unemployment line elbowing his way ahead of you..."

"... bad enough already fighting with the little old lady for the stale bread crust. Now you gotta wrestle for sleeping space with some banker with a bad comb over and a $5,000 suit?"

My Russian friends who are old enough to remember the Brezhnev Kleptocracy Soviet days tell me:

Bet on the Babushka

An old lady can out elbow a banker with bad comb over in a bread line any day...

Bob's picture

Dive, dive, dive!  Moody's sees problems (they must be inches from the iceberg then.)

Nice to see them being so conscientious in warning.  Imagine if any subtantial regulation were introduced to the "looming threats to TBTF bank" prospects. 

Better to just keep things the way they are, I guess.  Or go through another Washington dog-pony that yields no substantive reform following another "long and historic battle for Reform."

Anonymouse's picture

Seems to me I should move my money into Bank of Goldman Sachs.

When does that retail branch open in my area?  Haven't seen one yet, oddly enough.

NoLongerABagHolder's picture

All this means is buy stocks.......

All any news anymore, good or bad, means is buy stocks.

They may never let the market fall again.

Joe Davola's picture

DON"T REGULATE ME BRO!

Charlie J's picture

If passage of this bill means that the stock market will tank, then we can be sure that this bill will not be allowed to pass.

hedgeless_horseman's picture

Legislative risk is a mother fucker.  No offense, Mom.

anony's picture

Dodd bill will not pass. No worries for the financial ripoff artists.

Captain Willard's picture

If Moody's had any integrity or self-respect left (I know, prima facie ridiculous), they would suspend their ratings for all banks with Level 3 assets exceeding 50% of tangible capital. Who the f*** knows how many "notches" are appropriate?

It's yet another absurdity in a parade of pitiful folly.

Rainman's picture

My thoughts exactly. Moody's doesn't need Dodd threats as a reason to move this group of banksters to where they really belong.

Impossible to believe the banks had nothing to do with this " warning ".

Absurd is the proper term. 

chet's picture

Aaah, a little "market will tank" blackmail about impending legislation.  Par for course.

They'll give the worst tranche of some subprime mortgages out of South Florida a AAA, but threaten some regulation and they'll "be forced to cut ratings" before the bill hits the President's desk.

Bullshit.  This is Denninger bait.

Fritz's picture

Moodys can't spell Downgrade.   

 

Al Huxley's picture

So basically, Moodys isn't rating the banks per se, but rather the ability and willingness of the government to force taxpayers to foot the bill for any 'misadventures' the banks might get into.  Or put another way, 'if you want the banks to continue to be able to lend money to you, you're going to have to give them more money'.

mister_x's picture

"Support assumptions", "uplift"...

WTF? Disgusting.

Mr Lennon Hendrix's picture

And so prop desks remain in use.

Madcow's picture

"Economic Recovery" is now synonymous with "Accounting Fraud"

 

Welcome to the future of the USA

Thisson's picture

Actually, this could be the bat signal to get out of the market.

They are now realizing they can no longer keep up the pump and will be forced to recognize losses, so they are starting to argue over who will have to eat it and in what order (hence the discussion of priority of claims).

Joanito's picture

What's this reckless and un-patriotic talk of haircuts?  I thought that that kind of talk was made illegal in the fall of '08.  There were bazookas leveled on the American people to get the point across dammit.  We will sooner see Dick Cheney in assless chaps dancing "the forbidden dance" with President Obama than see even one unsecured creditor's hair get hurt in the event of.... an event.  My thoughts are load up on shares of those banks now, hold until the vote, and then buy more shares on margin.  Originally, I thought I'd short now and cover/go long the minute that this farcical tripe bill is gutted, but, the longest period of time that the market is allowed to sell off is roughly 1-2 trading sessions.  Not worth shorting.  The machine is in no mood to pass on a volumeless short squeeze now.  Must stay parabolic, at least until the last few pensions go all in. 

Mr Lennon Hendrix's picture

End tbtf now that all the chosen ones have been taken. Fed wants total control for the destruction of America. Sacrifices now commence.

deadhead's picture

someday the market is going to recognize that these banks are only worth 20-50% of what they are trading at.  how anybody in their right mind could own a bank stock is beyond me.  they are insolvent or nearly so.

A Man without Qualities's picture

but "the market" is the selfsame banks.  They've been given free money by the Fed and they are buying each other's stocks, passing them between each other all day everyday, to prove they can sell these trading assets at any time and pushing the markets up into the close to make the positions look good for the end of day reval.  It's just the same shit they were doing with the CDO market and it was all good until it wasn't.  I suppose they realize if it goes down from here, they are history anyway.

What I wonder is, of these traders at the TBTFs, who get a proportion of their comp in equities, how many have kept them and how many have sold them?  

Rainman's picture

Might as well play til the whistle blows. Got to end the first quarter very strong....9 days away. Mega bonus looting is the only asset class the banksters do fair valuation/risk analysis on anyway.  

boeing747's picture

Don't trust bank stocks, people in Hong Kong discovered HSBC intentionly covered up 16.1Billion ABS related loss in 2009 year end report.

chindit13's picture

Now that it is clear to people both living and dead that no amount of market manipulation is against the rules so long as it is to the upside, we can expect an end of quarter ramp of epic proportions.  When that investor snapshot is taken on the 31st, and performance fees are calculated, the phones at New York's better escort services are going to be ringing off the hook.  They'll be saying "Who needs Tiger Woods?".

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