(Adds history of Moody's action, details on ratings, background
on financial crisis)
By David Henry
NEW YORK, Nov 14 Moody's Investors Service cut
the debt ratings for four big bank holding companies, including
Morgan Stanley and JPMorgan Chase & Co, citing
its increasing confidence that the U.S. government will not bail
out the companies if they fail.
The cuts may increase banks' borrowing costs and force them
to post more collateral in derivatives trades, weighing on their
profits. The downgrades also underscore how regulators are
successfully convincing at least some parts of the bond markets
that in a crisis, investors in the bank holding companies will
likely have to take losses.
The Federal Deposit Insurance Corp has hosted dozens of
meetings with bond investors, analysts, and other stakeholders
since last year to explain how this scenario would play out.
In a statement on Thursday, Moody's Managing
Director Robert Young said that the U.S. government's bank
regulators have created a credible plan.
With the banks expected to receive less government support,
Moody's said it was cutting its ratings for holding companies
for Bank of New York Mellon Corp, Goldman Sachs Group
Inc,, JPMorgan Chase, and Morgan Stanley by one notch.
Moody's confirmed senior holding company ratings for Bank of
America Corp, Citigroup Inc, State Street Corp
and Wells Fargo & Co. Representatives of Bank of
New York Mellon, Goldman Sachs and JPMorgan declined to comment.
A Morgan Stanley spokesman had no immediate comment.
Under the plan created by the Federal Reserve and the FDIC,
the FDIC would take over a failing bank holding company, wiping
out the bank's shareholders and hitting some bondholders with
losses. The steps would keep the operating subsidiaries, such as
the deposit-taking banks, alive.
Bond investors and bank executives are watching to see how
the liquidation plans might change how banks fund themselves -in
particular, how much debt banks might issue from their holding
companies, and how much their operating subsidiaries might
issue. David Fanger, a Moody's senior vice president, said in an
interview that debt from the subsidiaries has become more
creditworthy as the government has developed liquidation plans
to focus on the holding companies.
The Fed plans to issue a proposal to require the largest
banks to issue minimum amounts of long-term, unsecured debt from
their holding companies to absorb losses in a liquidation.
The federal government was forced to bail out a number of
major banking and insurance companies starting in 2008, as the
world's financial system stood at the brink of disaster. That
prompted demands for rules that would prevent a repetition of
any situation in which a company would be deemed "too big to
Downgrades often increase a company's borrowing costs over
time, but given that banks have so many subsidiaries that can
issue debt, the impact of a holding company downgrade may not
always be dramatic.
Banks also often have to post more collateral to support
derivatives trades when they are downgraded. But because many
banks trade the instruments in operating subsidiaries instead of
their holding companies, these downgrades may not force big
'AMONG THE MOST IMPORTANT GOALS'
At a Senate confirmation hearing today, Federal Reserve
chairman nominee Janet Yellen said that "addressing too-big-to-
fail has to be among the most important goals of the post-crisis
Regulators have acknowledged that one issue with the
liquidation plans replacing too-big-to-fail bailouts is how to
coordinate actions with authorities abroad when troubled banks
have operations in multiple countries. Another issue is, how to
liquidate banks if they all fail at the same time and there are
few buyers for assets, which can happen during a crisis.
Bank of America and Citigroup holding company ratings were
not changed because their underlying strength improved enough to
offset Moody's lower expectation of government support. Bank of
America's capital strength is better, its risk of major losses
is down and its expenses are declining, Moody's said.
Citigroup's balance sheet is stronger and it is more
reliably profitable, the ratings agency said.
But Moody's lifted the long-term deposit ratings for both
Bank of America and Citigroup's bank subsidiary units.
Moody's telegraphed the likelihood of its cutting bank
holding company ratings in August.
With the cut, the holding company for Morgan Stanley is now
rated the same as Bank of America's and Citigroup's holding
companies: Baa2, or two steps above junk status. Goldman was cut
to a level three steps above junk, while Wells Fargo remains
five steps above. BNY Mellon is six steps above.
Below are the ratings for long-term senior unsecured debt for
the bank holding companies.
Bank Holding Company New Rating Old Rating
Bank of America Corp Baa2 Baa2
Bank of New York Mellon Corp A1 Aa3
Citigroup Inc Baa2 Baa2
Goldman Sachs Group Inc Baa1 A3
JPMorgan Chase & Co A3 A2
Morgan Stanley Baa2 Baa1
State Street Corp A1 A1
Wells Fargo & Co A2 A2
(Reporting by David Henry, Lauren Tara LaCapra and Peter
Rudegeair in New York and Douwe Miedema in Washington.; Editing
by Dan Wilchins, Gary Hill, James Dalgleish and Eric Walsh)