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S&P Cuts BofA, Citi Outlook Due to Gov’t Help Ambiguity
Think of it as the opposite of moral hazard.
There was a time during the credit crisis when moral hazard raged so greatly that investors bet on government aid to the nation’s financial institutions. Heck, some might argue that TARP is moral hazard incarnate.
Today, however, moral hazard took a hit. Standard & Poor’s Rating Service dropped its ratings outlook for Bank of America Corp. and Citigroup, Inc. to “negative” from “stable.” Why? Was it because BofA or Citi will perform worse? Have the banks lost some key business? No, S&P slapped BofA and Citi because of its “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.” In other words, because S&P thinks the federal government is going to play talk-to-the-hand with these two banks (and presumably other banks).
Meanwhile, both BofA’s and Citi’s stand-alone credit ratings were raised three notches by the company.
S&P also said it is uncertain whether BofA or Citi can sufficiently improve their operating performance and profitability over the next two years to benefit their stand-alone credit profiles and narrow the current gaps between the counterparty credit ratings.
Those stand-alone ratings not withstanding, S&P’s actions today still hint to the presumption of a significant change in the government’s attitude toward BofA and Citi. In other words, no more Mr. Nice Federal Government Guy.
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