Big Banks Bucketed

When your best friend turns – an enemy is in the making.

Standard and Poors Rating Services (S&P) has downgraded a significant number of banks worldwide – as listed on their website (1) and included in these Banks are US heavyweights – shareholders no doubt of the Fed.

In addition a raft of other Banks including all Saudi Banks and fair swathe of European financial institutions.

The US firms affected include JPMorgan (NYSE:JPM), BofA (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), BNY Mellon (NYSE:BK) and State Street (NYSE.STT).

S&P stated “We now consider the likelihood that the U.S. government would provide extraordinary support to its banking system to be uncertain,”

This comment is no doubt in line with the G20 decision on November 11th (2) whereby the Global regulators set out their “final tools” for ending the phenomenon of “too big to fail” banks, amongst these includes a winding down program.

No longer can they ‘expect’ unconditional support from the State.

As Reuters then advised, Mark Carney, chairman of the Financial Stability Board (FSB) that coordinates regulation across the Group of 20 economies (G20) to plug gaps highlighted by the 2007-09 financial crisis, said many of the key reforms have been implemented decisively and promptly.

What utter tripe – ‘decisively and promptly’ – since 2009 it has taken them this long to finalize the report and reforms. Yes – the FSB was tasked in 2009 with introducing a welter of reforms from increasing bank capital requirements to shining a light on derivatives markets and curbing bankers’ bonuses.

 

 

So what took S&P this long – in view of the Fed’s comments back on October 30th that US Banks are under capitalized by $120 billion? (3)

Me thinks it had something to do with a request for the US Banks to get their house in order – all US (and overseas Banks for that matter) are subject to ‘defaults’ on billions of dollars worth of exposure on collateral demands.

All of the collateral demands could be triggered by a downgrade – and in saying this – the Banks own 10-K filings at the SEC quite openly state that “US Government support ‘inferred by the ratings agencies’ is a vulnerability and it should be removed.”

So the next extension to this is – that the downgrades themselves impose ‘a greater lending risk’ and therefore interest rates for borrowings will have to be increased.

Here we have an initial report of deficiencies in Banks capital at the end of October and a mid November 2015 report by the G20.

Why did not S&P act sooner?

Yes a ‘day’ in itself is a long time when deals are being written and leverage and then settled – and it would take a few weeks to warn creditors of the downgrade to the Banks by the Banks themselves – with a comment to the creditors “that not to worry, we have everything covered” – or words to that effect.

And by the by – where are the other credit ratings reports on these Banks?

One would have thought that the Credit Ratings agencies would be trying to establish their own reputation more promptly in light of the 2007-2008 reports they issued on Collateral Debt Obligations (CDO’s)

The spotlight on all Banks should be increased – in particular Deutsche Bank – a prime candidate for worst Bank of the century. Horribly under capitalized – as reported by Reuters some 5 months ago. (4)

We shall wait and see – nice timing in view of the situation developing around the globe.

 

Postscript:

I have been away for a fair few days. Catching up.

1. https://www.standardandpoors.com/en_US/web/guest/ratings/press-releases

2. http://www.reuters.com/article/2015/11/09/us-g20-regulations-carney-idUSKCN0SY0PL20151109

3. http://www.bloomberg.com/news/articles/2015-10-30/u-s-banks-to-face-120-billion-shortfall-under-fed-crisis-plan

4. http://www.reuters.com/article/2013/06/14/us-financial-regulation-deutsche-idUSBRE95D0X620130614