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Moody's cuts BofA, Wells Fargo and Citigroup credit ratings

Moody's cites 'a decrease in the probability that the U.S. government would support' the three major banks in future financial crises as the reason for its credit downgrades.

September 21, 2011|By Nathaniel Popper, Los Angeles Times
  • Bank of America customers use its ATMs in New York in 2009. Moody's downgraded the credit rating of BofA and two other major banks, citing a decrease in the probability that the U.S. government would support them in future financial crises.
Bank of America customers use its ATMs in New York in 2009. Moody's… (Peter Foley, European Pressphoto…)

Reporting from New York — Moody's Investors Service has cut the credit ratings of three major U.S. banks, saying that Washington is less likely to bail out big U.S. financial companies if another financial crisis were to hit Wall Street.

The rating company Wednesday downgraded the long-term credit ratings of Bank of America Corp. and Wells Fargo & Co. and bumped down Citigroup Inc.'s short-term credit rating, citing "a decrease in the probability that the U.S. government would support" them in future financial crises. However, Moody's still believes that the likelihood of such bailouts would be "very high" if there was any kind of systemic danger.

The moves come at a time when banks are struggling to retain investor confidence because of the flagging economy and continuing fallout from the financial crisis. In a separate move Wednesday, Standard & Poor's downgraded the ratings of seven Italian banks because of their holdings of low-quality sovereign debt.

"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," Moody's said in the report.

After the downgrades, bank stocks helped lead markets down Wednesday, with Bank of America falling 52 cents, or 7.5%, to $6.38. Wells Fargo has been among the better-performing bank stocks in recent months, and its shares fared relatively well, falling only 96 cents, or 3.9%, to $23.71, significantly less than other banks that were not downgraded.

Bank of America saw its rating with Moody's drop two levels, to Baa1 from A2, while Wells Fargo was downgraded one level, to A2 from A1. Citigroup's rating remained at A3, but the rating on its short-term debt was bumped down one notch. The other two major credit rating companies have not made similar moves.

Moody's noted that the downgrades weren't based on the fundamental financial condition of Bank of America and Wells Fargo and that it upgraded a rating of Citigroup's financial condition, stating that the bank has made "progress in installing better risk management."

After the decision, Bank of America said, "We believe our rating should be higher," and Citigroup said, "We completely disagree with the Moody's change." Charlotte, N.C.-based BofA said, though, that it had prepared for such a change and had locked in funding for the rest of the year.

Wells Fargo said in a statement that the downgrade was caused only by assumptions about government support, not the San Francisco bank's credit quality.

During the financial crisis, the government stepped in to provide big cash infusions to all of the nation's largest banks, helping some of them avoid filing for bankruptcy. Bankers and politicians said the size and financial importance of the banks made the bailouts necessary.

Moody's and other credit rating companies have given the major banks higher credit ratings because of the assumption that the government would step in to help them if they ended up in trouble.

Since the crisis, though, Congress has passed a financial reform bill that set out to reduce the probability of future government bailouts, and Moody's said the law made it more likely that the government would allow a big bank to file for bankruptcy.

Many commentators have raised doubts about whether the government will be able to avoid future bailouts because the largest banks, including Bank of America, have grown in size since the financial crisis.

Moody's analysts largely agreed with this assessment Wednesday, writing that the probability that the government would provide help to a big bank during future crises was still "very high."

Banks are given different advantages in Moody's rating system because of the assumptions about government support in future crises. Moody's said the credit ratings of other big banks, such as JPMorgan Chase & Co., accurately reflect the probability of future government support.

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