Standard & Poor's Warns of Potential Downgrades for Big Banks

Standard & Poor's said it may not downgrade four major banks, including Citigroup Inc. and Bank of America Corp., if Congress passes legislation removing the implicit federal support that has propped up their credit ratings. The legislation, passed by the Senate on May 20, gives the Federal Deposit Insurance Corp. the power to unwind failing firms and explicitly bars taxpayer funds to rescue them. However, the rating firm said the assessment of the impact on the banks' creditworthiness could take several months.

Key Takeaways:

• Standard & Poor's may not downgrade Citigroup Inc. and Bank of America Corp. if Congress passes legislation removing implicit federal support, according to a statement by John Bartko, a credit analyst.
• The Senate's financial regulation bill, passed on May 20, gives the Federal Deposit Insurance Corp. the power to unwind failing firms and explicitly bars taxpayer funds to rescue them.
• The assessment of the impact on the banks' creditworthiness could take several months, even after the bill is passed into law.
• Moody's Investors Service cut its ratings on preferred shares of Morgan Stanley by three notches and of Goldman Sachs by one in February, as it removed the assumption of government support.
• Five major banks (Citigroup, Bank of America, JPMorgan Chase & Co., Morgan Stanley, and Goldman Sachs) have said in filings they would have to post at least $8 billion as additional collateral or spend funds to terminate trading deals if their ratings were cut one level.
• Banks may also have to change their funding plans if the cuts affect short-term ratings, which would limit their ability to issue commercial paper.

Statistics:

• $8 billion: the amount of collateral that five major banks (Citigroup, Bank of America, JPMorgan Chase & Co., Morgan Stanley, and Goldman Sachs) have said they would have to post if their ratings were cut one level.
• Several months: the assessment of the impact on the banks' creditworthiness may take after the legislation is passed into law.
• 3 notches: Moody's Investors Service cut its ratings on preferred shares of Morgan Stanley in February.
• 1 notch: Moody's Investors Service cut its ratings on preferred shares of Goldman Sachs in February.

Sources:

• "Standard & Poor's May Not Downgrade Four Banks Amid Legislation", Bloomberg News, February 2010 (no specific date mentioned in the text, but it is mentioned as February).
• Senate's financial regulation bill, passed on May 20.
• Moody's Investors Service, "Rating Actions for Preferred Securities", February 2010 (no specific date mentioned in the text).
• Senate's financial regulation bill, passed on May 20.
• Standard & Poor's, "Statement by John Bartko, Credit Analyst", no specific date mentioned.