Moody's thinks we should be. In its announcement of bank downgrades yesterday, Moody's noted that it actually lifted up some of the banks by a few notches. It's a backhanded compliment. This was the paragraph that was included in the ratings of Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and UBS:
[Bank]'s ratings benefit from an uplift....reflecting Moody's assumptions about the very high likelihood of support from the U.S. government for bondholders or other creditors in the event that such support is required to prevent a default.
For those who don't speak Wall Streetese, let me translate for you:
Moody's figures that if this bank really goes belly up, the government will be right there to make sure anyone who owns those bonds will get a bailout.
So Too Big to Fail really is still alive.
This is particularly interesting because part of the conversation last week on Capitol Hil involved some discussion of what to do with risky banks. JP Morgan Chase CEO Jamie Dimon recommended that the government eliminate Too Big to Fail for "big, dumb banks" by going "Old Testament" on them and letting them go bankrupt. For good measure, Dimon followed up with a speech about how the U.S. has the "widest, deepest" capital markets in the world, which ensure free flow of credit and money.
It's not particularly brave for a bank CEO to urge Congress to eliminate his rivals - but Dimon brought up smart points nonetheless. The government is unprepared to let a big bank fail. The mechanisms are still not in place to unwind these behemoths, despite years of wrangling over Dodd-Frank provisions that would make it easier.
But Dimon's bold suggestion may end up biting his own bank, if Moody's is correct. Moody's didn't include its backhanded "hey, you'll get a bailout" paragraph for JP Morgan. This is what it said instead:
The negative outlook on parent holding company reflects Moody's view that government support for US bank holding company creditors is becoming less certain and less predictable, given the evolving attitude of US authorities to the resolution of large financial institutions, whereas support for creditors of operating entities remains sufficiently likely and predictable to warrant stable outlooks.
Moody's believes that the government won't necessarily bail out JP Morgan as many lawmakers dig in their heels about the importance of stopping bailouts.
There's an inconsistency here: the term "large financial institution" applies to all the banks that Moody's downgraded. So it's not really clear why Moody's believes that Bank of America, Citigroup, Morgan Stanley and Goldman Sachs would all get bailouts but regulators would dig in their heels and refuse to help JP Morgan, which is the nation's largest and most successful bank. Is it the London Whale? JP Morgan's perceived hubris last month?
Either way, it ends in irony. Dimon, who saved the government an enormous amount of trouble by buying both Bear Stearns and Washington Mutual, now has to question whether the government would help his very own bank.
What an outcome. It would be harsh. It would be unforgiving. It would be, in fact, very Old Testament.