S&P goes negative on Bank of America, Citigroup

Standard & Poor's cut its credit outlook for Citigroup and Bank of America to “negative” from “stable,” warning that shifts in the political winds don't bode well for some investors in these large institutions.

Standard & Poor’s cut its credit outlook for Citigroup and Bank of America to “negative” from “stable,” warning that shifts in the political winds don’t bode well for some investors in these large institutions.

Specifically, S&P said that if additional government rescues are necessary, owners of bonds in these two banks would likely be required to absorb losses. Bond holders were spared any pain when the government twice bailed out Citi and BofA, but shareholders were nearly wiped out as the banks’ stock prices sank into the single-digits.

Bond investors may not be so lucky the third time around, S&P advised, citing language in a bill approved by the House of Representatives in December that requires bond holders take losses when a sick financial institution is wound down.

S&P also said that the Obama administration’s proposed tax on banks based on the size of their liabilities “further underscores the extent to which the political climate” has changed. If the tax were approved by Congress, Citi would have to ante up an additional $2.1 billion annually, according to Moody’s, and BofA would be on the hook for $1.7 billion, which is equal to 21% of last year’s pretax income.

S&P added that its credit ratings for Citi and BofA, currently at A, are enhanced by three notches thanks to the potential for “additional extraordinary government support.” That means without taxpayer backing the banks would be rated BBB, which is two notches above junk.

Mr. Elstein is a reporter at Crain’s New York Business, a sister publication to InvestmentNews.