Flaherty & Co. slap Moody's

News item: G20 commits “to take all necessary actions to preserve the stability of banking systems and financial markets as required.”

At the time, it seemed “stupid”, as Kim Parlee and I discussed on BNN Television last week. Moody’s downgraded the debt ratings of Bank of America, Citigroup and Wells Fargo on the basis that the government is:

“more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled”

For a credit propeller head, this position is almost impossible to arrive at in the absence of clear smoke signals from the U.S. Congress, and the downgrade rationale is certainly impossible to validate on an analytical basis. Earnings, tangible book equity, liquidity, leverage ratios, these are areas that are suitable for a credit rating agency to opine upon. But a subtle change in political calculus? Seems outside their area of expertise to say the least.

It took just 24 hours for the downgrade to be proven wrong, as the G20 Finance Ministers issued this statement from Washington:

We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required. We will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines. Central banks will continue to stand ready to provide liquidity to banks as required. Monetary policies will maintain price stability and continue to support economic recovery.

None of that sounds like an acknowledgement that Citigroup will be allowed to fail. S&P should stick to its knitting, and leave the armchair political analysis to Politco.com.

MRM