The big banks are less likely today to get a federal bailout than they were a year ago, Moody’s has concluded, spurring the credit ratings agency to downgarade Bank of America, Citigroup, and Wells Fargo.
Don’t start your “When I say ‘Dodd!’ You say ‘Frank!'” cheers just yet. You’re still probably on the hook for losses at the big banks, because the government still can’t really unwind a big bank, and would probably have to just save it. Here’s the nut of the issue from Moody’s report on Citigroup:
Specifically, “The holding company’s long-term senior debt ratings now incorporate two notches of uplift due to systemic support, down from three notches previously.”
I wrote in June about how this means we’re still subsidizing the big banks: “Put another way: Anyone lending money to big banks (by buying their bonds, for instance), does so on the assumption that if the bank cannot repay the loan, U.S. taxpayers will.”
Moody’s in June had suggested that the Dodd-Frank financial regulation bill could substantially lower the bailout affect. This hasn’t quite materialized yet, Moody’s writes in its Bank of America report:
However, the final form of several critical components of Dodd-Frank intended to reduce such interconnectedness, such as resolution plans or changes to the over-the-counter derivatives market, are still pending. There is also no global process yet in place whereby regulators could resolve a global financial company such as Bank of America in an orderly fashion. As a result, Moody’s believes that it would be very difficult for the US government to utilize the orderly liquidation authority to resolve a systemically important bank without a disruption of the marketplace and the broader economy.
Dan Indiviglio at the Atlantic argues Moody’s should also consider the Tea Party in its ratings of Big Banks:
Talk about grabbing the pitchforks.
