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Moody's 'Out of Its Mind,' Ratings Action 'Absurd': Bove

Moody's downgrade of three major banks on the premise the U.S. government will not stand behind them if they fail is "absurd," said Rochdale Securities analyst Dick Bove.

Dick Bove
cnbc.com
Dick Bove

Financial stocks fell and bank credit default swaps widened after Moody's cut debt ratings on Bank of America , Wells Fargo and Citigroup on worries the government won't be there to bail them out. Moody's cut Bank of America long-term senior debt rating to Baa1 from A2 and its short-term debt rating to "Prime 2" from "Prime 1." It said the long term outlook on the bank's senior ratings remains negative.

"That is so absurd I can't believe anyone would even write it. This is the largest bank in the United States," said Bove of Bank of America. "It has business with one out of every five households in the country. The assumption is that the United States government would allow this bank to go under and pull all of those other people under with it!"

"In my view, I think Moody's has lost its mind," said Bove, known for his outspoken views.

Bove also said the downgrade created a buying opportunity in Bank of America stock.

Bank of America immediately fired back. It said Moody's decision to cut its credit rating does not reflect a weakening of the bank's intrinsic credit quality, and it noted that Moody's itself stated that it has made significant progress in improving its capital and liquidity positions. It also said Moody's' concluded it has ample resources to absorb the additional losses expected from its mortgage business.

"If Bank of America went under, basically it has to call all the loans it has—$940 billion in loans outstanding. In addition, it has $1.38 trillion in deposits. You think the FDIC can cover that?...The idea that the U.S. government would allow it to fail is beyond the realm of possibilities," Bove said.

Moody's said "the government is more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute." Moody's took the action after a three month review. In June, it had said the banks face a potential downgrade.

It cut Citigroup's short-term rating to "Prime-2" from "Prime-1." It affirmed Citigroup's long-term rating of A3 and its Prime-1 short term rating on Citibank NA. Moody's did say Citigroup's liquidity profile has been strengthened significantly in the past two years. Wells Fargo was also cut by one notch to A2, and its stock recovered after immediately falling on the downgrade.

Bank of America recovered some of its losses and was down 3 percent in mid-afternoon trading. Citigroup was down just slightly.

"Bank of America is in a position where it is shrinking and paying off its borrowings. If you take a look a the total amount of cash on its balance sheet versus the total amount of longer term debt on its balance sheet, bank of America has enough money to pay off every dime of short-term debt tomorrow," he said. He noted Bank of America has $140 billion in cash, while its short term debt and trading obligations total $125 billion.

"Basically you can't run this company out of business," Bove said. Bove said Bank of America could solve ties problems if it were to put its Countrywide mortgage business it acquired into bankruptcy.

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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