Moody's Reviews U.S. Banks, Effectively A Downgrade Without Formality (BAC, C, WFC, BK, FAS, FAZ)

Moody’s is not without question over how it rated (and still rates) many issues after the credit crisis.  The problem with that caveat is that ratings agencies are still considered relevant by many investors because no real mechanism has replaced them.  News is out on Thursday that Moody’s Investors Service has now placed the deposits, senior debt, and senior subordinated debt ratings of some major U.S. banks “on review for possible downgrade.”

The banks hit by the note are Bank of America Corporation (NYSE: BAC), Citigroup, Inc. (NYSE: C), and Wells Fargo & Company (NYSE: WFC).  Many of the notes inside the report seem damning on the surface.  The problem we see, or don’t see, is that there is nothing new acting as the catalyst for today’s action.  The points brought up today have been brewing for months and months.

Moody’s noted, “Each of these ratings currently incorporates an unusual amount of ‘uplift’ from Moody’s systemic support assumptions that were increased during the financial crisis.”  Moody’s noted that this review focuses on whether the ratings should be adjusted as a result.

As far as Bank of America Corporation (NYSE: BAC) and Citigroup, Inc. (NYSE: C), Moody’s did note that it will actually assess improvements in the standalone financial strength and that those strengths “may temper the extent of any downgrades”… It sure sounds like the banks have already been cut if you read those words.

Key issues cited are the impact of the Dodd-Frank Act and that current government support exceeds pre-crisis levels.  The report also brings up the added mortgage risks in there and the risk of higher credit costs along with higher litigation costs related to foreclosure practices. Ask yourself if any of that is new.

Moody’s also threw in the report that Bank of New York Mellon Corporation (NYSE: BK) has been revised to Negative from Stable.

We have been critical of the “independent ratings agencies” since the start of the financial crisis began.  Our take is that these guys wouldn’t know what a “Triple-A” credit rating meant on a billionaire’s super-yacht.

Bank of America Corporation (NYSE: BAC) shares have gone into the red and the stock is now at $11.15 after a drop of $0.08 on the day so far.  Keep in mind that the 52-week low is now only $10.91.  Citigroup, Inc. (NYSE: C) shares are down 1.2% at $39.15 and yesterday was the first sub-$40.00 close we have seen since its reverse split.  Wells Fargo & Company (NYSE: WFC) is down the most as it was not given a special exception and shares are down 1.5% at $26.54.  Our technical analysis affiliate is Adam Hewison of INO and he noted just this morning in a quick audio-video chart how so many of the banks are seeing extreme technical weakness.  Maybe this is the fundamental catalyst behind the technical move.

Now, here is what you need to consider.  Moody’s just downgraded these banks even if it did not formally downgrade the banks.  The effective language that the “strength could temper debt downgrades” is what you need to focus on.  Avoiding is not defined as “tempering.”

Today’s news is the same as a downgrade with the formality of that downgrade.  Too bad that the research is not based upon new data.  What we find even more sad about the news is that the formal downgrades ahead will still matter to the markets.  It comes at the same time that newer broad economic data is weakening above what Moody’s is considering today.  To prove this point on weaker data, the 10-Year Treasury Note yield has just gone back under 3.00% this week for the first time since December and is currently at 2.99%.

The move is actually not being seen in the hyper-volatile triple-leverage ETFs of the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ).  The “triple-bull” is only down about 0.6% and the “triple-bear” is up only about 0.6%.  Our take is that these leveraged ETFs would be up and down by several percent if there was some real meat to this Moody’s ratings action.

Now we all have to hope that this action from Moody’s doesn’t trigger even tighter capital requirements at the banks than there already is.

JON C. OGG