Moody's says that a rescue is now a little less likely, but is it underestimating Congress's new-found hatred of bailouts?
Did last summer's financial regulation bill work to end the too big to fail problem after all? By looking at the downgrade news out of Moody's, you might think so. The firm has cut ratings of three major banks: Bank of America, Citigroup, and Wells Fargo. Although the particular downgrades differed by bank, Moody's rationale was the same for all three: it sees a government rescue of these banks as a little bit less probable. How safe are taxpayers from future bailouts?
What Moody's Actually Said
Here's a key excerpt from Moody's downgrade note for Bank of America:
Moody's continues to see the probability of support for highly interconnected, systemically important institutions as very high, although that probability is lower than it was during the financial crisis. During the crisis, the risk of contagion to the US and global financial system from a major bank failure was viewed as too great to allow such a failure to occur -- a view borne out in the aftermath of the Lehman failure. This led the government to extend an unusual level of support to weakened financial institutions and Moody's to incorporate the expectations of such support in its ratings. 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.
So the decision was in large part due to the simple fact that Moody's doesn't see the U.S. on the brink of financial crisis any longer. As a result, if one of these firms were to fail, then the government is probably in a better position to let that happen.