Standards & Poor’s today joined Moody’s in suggesting the Dodd financial reform bill could result in the downgrading of big banks benefiting from government support, notably Bank of America (BAC), Citigroup (C),Morgan Stanley (MS) and Goldman Sachs (GS).
Government support currently is boosting S&P’s ratings of BofA, Citi and Morgan Stanley by three notches and Goldman’s by two notches. Moody’s took a similar view in its analysis of the Dodd bill: Moody’s ratings are currently boosted by 4 notches for BofA, three for Citigroup and Wells Fargo, two for Morgan Stanley and one notch for Bank of New York/Mellon, JPMorgan, Goldman, SunTrust, and Regions Financial.
“we believe the bill in its current form seeks to provide a framework for an orderly wind-down of large nonbank financial institutions the government deems insolvent. If we conclude that the potential for additional extraordinary support diminishes if the legislation passes in its current form, this could have negative rating implications for four companies: Bank of America Corp., Citigroup Inc., The Goldman Sachs Group Inc., and Morgan Stanley, whose ratings currently benefit from what we view as a potential for extraordinary government support. However, as part of any reassessment of our ratings on these companies, we would also take into account aspects of the legislation that we view as favorable to their creditworthiness, plus other developments that may affect the companies’ standalone credit profiles.”
“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.”
Full analyses of the Dodd bill are available from Moody’s and S&P.
More analysis can be found at FTAlphaville and ZeroHedge.
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