Banks Tumble on Moody's Downgrades and Fed Announcement

Brittney Barrett |

U.S. financial stocks took another sharp blow on Wednesday following the release of details from the highly anticipated Federal Open Market Committee. Banks had been having a slow couple of days as investors awaited word from the Fed regarding potential additional measures of economic support. The Fed announced Wednesday that it would purchase $400 billion in Treasurys with remaining maturities of 6 to 30 years by June 2012 while simultaneously shedding and equal number of securities with maturities of 3 years and below. The Fed hopes the decision will help make for more affordable credit and encourage spending and investments.

The decision, agreed up by a seven-out-of 10 margin, comes with the risk of increased inflation. The message is not only that the Fed wishes to help, but feels the economy is at a level where some degree of inflation must be swallowed to spur the slowing growth. This may have sounded an alarm to some investors as it did to Republican Congressional leaders who encouraged the Fed to take no action in a recent letter. Given the continued weakness in the housing and employment markets, people are split in terms of the efficacy of some of these government measures.

In addition to the this decision, several Moody’s downgrades for Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) dented the sector for the day.

Moody’s Investors Service said the downgrades were primarily motivated by the understanding that the government would be less prone to bail out these major financial institutions in the event of a repeat economic crisis.

 

Rather than offering a second bail-out to these institutions, Moody’s presumes that banks would enter into a state resembling typical bankruptcy as described in the Dodd-Frank Wall Street reform bill.

 Bank of America (BAC), among the world’s largest banks, appeared to be nearing another catastrophic breakdown before being supplemented by a $5 billion investment from billionaire-investor Warren Buffett’s Berkshire Hathaway fund earlier this year. Thus far, Buffett has hardly been rewarded by his investment, as shares of the North Carolina based institution continue to suffer alongside ongoing legal troubles from the 2008 financial crisis and global debt concerns.

 

BofA’s long-term senior debt has been reduced a considerable two notches to Baa1 while Wells Fargo was cut from A1 to A2. Meanwhile, short-term debt at Citibank has been slashed to Prime-2.

Naturally, shares of each of these banks tumbled in the aftermath with Bank of America taking the worst hit of the three.

Also trading sharply lower was Morgan Stanley (MS), which hit a new 52-week low, closing at around under $14.00 and down 44.3 percent year-to-date.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AGCO AGCO Corporation 60.35 -0.31 -0.51 868,887
C Citigroup Inc. 60.04 -0.11 -0.18 22,804,941
MS Morgan Stanley 43.73 0.15 0.34 12,115,063
BAC Bank of America Corporation 23.09 0.14 0.61 130,590,406
WFC Wells Fargo & Company 57.14 -0.15 -0.26 20,331,186

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