Archive for the ‘BoA Deathwatch’ Category

Moody’s Downgrades Bank of America — The Implications

Friday, September 23rd, 2011

On September 21st, Bank of America’s credit rating. Moody’s explained the downgrade with the following statement:

Moody’s believes that the government is likely to continue to provide some level of support to systemically important financial institutions. However, it is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute.

Effectively, Moody’s is looking at the number of lawsuits pending against BoA, as well as the sorry state of its mortgage lending arm, and has decided that it’s highly possible that the government will allow BoA to fail. Let’s not forget that the Dodd-Frank Act also contains provisions for winding down failed or failing banks. If BoA begins to meet the criteria established within Dodd-Frank, then the Fed can liquidate it. Abigail Field has some interesting analysis on this issue .

Bank of America and the other downgraded lenders seem to think that this is about political and public policy more than it is about the creditworthiness of the various banks. While I would agree that there is now a greater risk that the government will no longer backstop failing institutions, I disagree that BoA’s exposure on the mortgage side of things does not factor pretty heavily into this equation.

What we have here is a bank that is being nibbled to death by ducks. Of the umpteen cases filed against BoA right now, the vast majority are in the very early stages. If each case was to go to trial, who knows how long BoA would be on the hook. Some analysts have suggested that BoA may to bankrupt its Countrywide arm, which it may still be able to do. However, if that happens, there’s a much higher likelihood of the Fed stepping in under the Dodd-Frank Act and liquidating BoA outright.

In either event, all of this is pure speculation until the other shoe drops. The way things have been going lately, I think that the other shoe is pretty darn close to dropping.

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