Credit rating agency Moody’s Investors Service, has given seven U.S. banks higher ratings, simply because the rating agency believes that the government would bail them out. Data from Moody’s Analytics show that credit default swaps on five of those seven banks are trading as if they are ranked two notch lower.
As the lawmakers try to convince derivatives traders that the government would shun bailing out the biggest banks in case of another financial crisis, Moody’s Corporation (NYSE:MCO) plans to reevaluate ratings, reports Charles Mead of Bloomberg.
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The rating company said in its March 27 report that the FDIC is working on a rescue plan, that will impose losses on holding company creditors to recapitalize important business divisions that face the risk of collapse. Ben Bernanke, the Federal Reserve chairman, said last month that the credit-default swaps market indicates the probability of bank failure.
Lawmakers and regulators want to prevent the need of a bailout even as the Federal Reserve has been compelling big banks to boost their balance sheet and retain a large sum to buffer against losses. Since the 2008 crisis, the U.S. financial firms have eliminated 322,000 jobs to increase profit amid weak revenue growth.
The credit swaps benchmark, Markit CDX North American Investment Grade Index, was down 2.6 basis points to 82 basis points in New York. Investors use the index to speculate on creditworthiness or to hedge against losses. The index falls when investor confidence rises and rises when investor confidence deteriorates in creditworthiness.
Last month, Moody’s said that it has started reassessing the ratings that are two levels higher due to implicit government backing. David Fanger, a Moody’s analyst, told Bloomberg that the government is planning to adapt policies to prevent the government from funding bailout in the future.
Moody’s has given JPMorgan Chase & Co. (NYSE:JPM) a senior debt rating of A2 due to presumed government support, but credit swap contracts imply a grade of Baa1. Similarly, Goldman Sachs Group, Inc. (NYSE:GS) has contracts that imply Baa2 rating, but Moody’s has rated it A3.
Other banks included in the review are State Street Corporation (NYSE:STT), Wells Fargo & Co (NYSE:WFC), The Bank of New York Mellon Corporation (NYSE:BK), Citigroup Inc (NYSE:C), Morgan Stanley (NYSE:MS) and Bank of America Corp (NYSE:BAC).