Moody’s Investors Service lowered its rating credit rating on Bank of America after the closing bell on Wall Street on June 21, 2012. As previously noted in the “Bank of America Declaration“:
The Bank of America is the country’s largest bank with assets of $2.3 trillion. This bank currently has $75 trillion in credit derivatives.
The Declaration also presented a list of grievances against this bank with a course of action concerning this financial institution. However this article will concentrate only on the reasons for the downgrade of the country’s largest bank: greed and arrogance. America is being misled: profit is not the same as greed. At some point, excessive profit does become greed but this is not what has happened with Bank of America: they made bad investments to generate excessive profit which did not come to fruition. They failed and started transferring debt to their customers and the American people:
Bank of America moved approximately$18 trillion worth of derivative obligations from Merrill Lynch and the BAC holding company to the FDIC insured retail deposit division. This transfers the risk from the bank to the taxpayers since the FDIC cannot cover this amount.
This latest credit downgrade has a major consequence: BofA will pay a higher premium on their debt service. What is the solution? If they continue with their past business model, their customers will pay the price to bail out the bank in the near term. And this leads to the second reason for their failed business model: arrogance. Bank officials will not address their debt: they will transfer it.
The reasons for Moody’s downgrade are shown in the excerpt below. We have two simple questions to ask ourselves.
1. Why would we do transactions with any bank which has shown such bad business sense that their credit rating for long-term senior debt is a few “notches” above junk status?
2. Why would we do business with any company which is in debt and has no presented no solutions to address this debt? This is why Moody’s gave BofA a “negative outlook” for the future.
If BofA loses 22% of it credit derivative speculations, this is equal to the GDP for the US for a year or the entire debt of the country. Anyone who owns this stock has invested in a company whose future value is zero.
Moody’s Investors Service lowered its rating on Bank of America on Thursday along with 14 of the largest banks in the world.
It said Bank of America is one of several banks that has had trouble with risk management or a history of high volatility. Compared to other banks, it lacks stable business that can act as “shock absorbers” to mitigate the volatility of capital markets.
Moody’s also said Bank of America is among banks that are implementing business strategy changes intended to increase earnings from more stable activities.
“These transformations are ongoing and their success has yet to be tested,” Moody’s said.
Bank of America Corp. CEO Brian Moynihan has sold off many non-core businesses in the last year. However, the bank also has a large portfolio of poor quality mortgage loans that it inherited from its acquisition of Countrywide Financial Corp. in 2008.
The rating on Bank of America’s long-term senior debt was lowered one notch, to “Baa2” from “Baa1.” The new rating is still investment grade, three notches above non-investment grade or “junk” status. Moody’s said it has a negative outlook on Bank of America’s credit.
Its long-term deposit ratings were dropped to “A3” from “A2” and its short-term to “P-2” from “P-1.”
Downgrades mean Moody’s sees greater risks in a company’s debt, and they usually make it more costly to raise money by selling debt because investors demand higher interest in return for taking on greater risk.