S&P Revises Outlooks on Citigroup, Bank Of America To Negative From Stable

Citigroup downgrade highlights:

• We believe there is increased uncertainty about the U.S. government's willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders.
• We are revising our outlook on Citigroup to negative from stable and affirming the ratings.
• We are also raising our hybrid capital issue ratings (excluding preferred stock ratings) on Citigroup.
• We believe Citigroup's stand-alone position has improved.

Rating Action

On Feb. 9, 2010, Standard & Poor's Ratings Services revised its outlook on Citigroup Inc. (Citi) to negative from stable. At the same time, we affirmed our counterparty credit and debt ratings on Citi (A/A-1; holding company). In light of what we view as improved stand-alone characteristics, we raised the ratings on its hybrid capital issues to 'BB-' from 'B+' (excluding its preferred stock, which we affirmed at 'C').

Rationale

The outlook revision reflects our increased uncertainty about the U.S. government's willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders. We previously stated our belief that the extraordinary support was temporary. We believe markets are beginning to stabilize and the U.S. government is seeking ways to reduce the potential for moral hazard and systemic risk associated with large financial institutions.

One such effort to reduce these risks is evident in the House bill (H.R. 4173) passed in mid-December that would specifically preclude the government from making company-specific bailouts, and would allow it to use public funds to assist in winding down an ailing financial institution only if that entity's debt holders incurred losses (see "Potential Legislation Could Constrain Government Support to Financial Institutions And Affect Ratings On Financial Institutions," published Dec. 16, 2009, on RatingsDirect). The subsequently proposed Financial Crisis Responsibility Fee, which would impose a significant cost burden on the largest banks, further underscores the extent to which the political climate may affect bond holders of these companies adversely. If such legislation were enacted in the form that has been proposed, it could cause us to revise the analytical basis we currently use for imputing extraordinary government support in our ratings on Citi and other highly systemically important financial institutions.

Outlook

The outlook is negative. Our rating on Citi continues to be enhanced, currently by three notches, to reflect the potential for additional extraordinary government support, should this be necessary. Ultimately, the counterparty credit rating and stand-alone creditworthiness may converge at the current stand-alone profile level (if it became necessary to remove enhancement for government support as a rating factor and we saw no apparent additional improvement in Citi's stand-alone credit profile); converge at the level of the current issuer credit rating (if there were very substantial improvement in Citi's stand-alone credit profile); or end up somewhere in between (with a combination of weaker government support and some improvement in the stand-alone credit profile).

We are uncertain whether Citi will be able to show sufficient additional improvement in its operating performance and profitability over the next two years to benefit its stand-alone credit profile and narrow the current gap between the counterparty credit rating--which incorporates our assessment of potential extraordinary government support--and its stand-alone creditworthiness.

Standard & Poor's Ratings Services will hold a telephone conference call on Feb. 9, 2010, at 11:00 a.m. Eastern Time that will include a discussion of this rating action. The live dial-in numbers for this call are: for the U.S., Canada, and all others, 1-210-795-1098; for the U.K., 44-20-7108-6248. The conference ID is 1837776, and the passcode is SANDP.

And Bank Of America action highlights, essentially a recap of the Citi "analysis":

• We believe there is increased uncertainty about the U.S. government's willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders.
• We are revising our outlook on BofA to negative from stable and affirming the ratings.

Rating Action

On Feb. 9, 2010, Standard & Poor's Ratings Services revised its outlook on Bank of America Corp. (BofA) to negative from stable. At the same time we affirmed all ratings, including its 'A/A-1' counterparty credit rating and our ratings on all related entities (see list below).

Rationale

The outlook revision reflects our increased uncertainty about the U.S. government's willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that benefits debt holders. We previously stated our belief that the extraordinary support was temporary. We believe markets are beginning to stabilize and the U.S. government is seeking ways to reduce the potential for moral hazard and systemic risk associated with large financial institutions.

One such effort to reduce these risks is evident in the House bill (H.R. 4173) passed in mid-December that would specifically preclude the government from company-specific bailouts, and would allow it to use public funds to assist in winding down an ailing financial institution, but only if that entity's debt holders incurred losses (see "Potential Legislation Could Constrain Government Support To Financial Institutions And Affect Ratings On Financial Institutions," published Dec. 16, 2009, on RatingsDirect). The subsequently proposed Financial Crisis Responsibility Fee, which would impose a significant cost burden on the largest banks, further underscores the extent to which the political climate affects bondholders of these companies adversely. If such legislation were enacted in the form that has been proposed, it could cause us to revise the analytical basis we currently use for imputing extraordinary government support in our ratings on BofA and other highly systemically important financial institutions.

Outlook

The outlook is negative. Our rating on BofA is enhanced, currently by three notches, to reflect the potential for additional extraordinary government support, should this be necessary. Ultimately, the counterparty credit rating and stand-alone creditworthiness may: converge at the current stand-alone credit profile level (if it became necessary to remove enhancement for government support as a rating factor and we saw no apparent additional improvement in BofA's stand-alone credit profile); converge at the level of the current issuer credit rating (if there were very substantial improvement in BofA's stand-alone credit profile); or wind up somewhere in between (with a combination of weaker government support and some improvement in the stand-alone credit profile).

We are uncertain whether BofA will be able to show sufficient additional improvement over the next two years in its operating performance and profitability to benefit its stand-alone credit profile and narrow the current gap between the counterparty credit rating--which incorporates our assessment of potential extraordinary government support--and its stand-alone creditworthiness.

Standard & Poor's will hold a telephone conference call on Feb. 9, 2010, at 11:00 a.m. Eastern Time that will include a discussion of this rating action. The live dial-in numbers for this call are: for the U.S., Canada, and all others, 1-210-795-1098; for the U.K., 44-20-7108-6248. The conference ID is 1837776, and the passcode is SANDP