Regulator Cites Moody's As Evidence of 'Too Big To Fail' Triumph

NEW YORK (TheStreet) --Commodity Futures Trading Commission Chairman Gary Gensler on Monday cited Moody's Investors Service (MCO) downgrades of giant U.S. banks as a sign regulators have made substantial progress on eliminating future bailouts of those institutions.

The regulator's statement provides further evidence of a return to duopoly status for Moody's and McGraw Hill Financial's (MHFI) Standard & Poor's ratings unit following a threat to their businesses after they were blamed for helping inflate the subprime housing bubble. 

Moody's credit analysts downgraded several banks last month, including JPMorgan Chase (JPM) and Goldman Sachs (GS), citing the removal of an "uplift" to their ratings from implicit government support. Other institutions, such as Bank of America (BAC) and Citigroup (C) were upgraded because of efforts by those companies to strengthen their balance sheets through moves such as increasing their capital cushions against losses and reducing leverage. The upgrades to Bank of America and Citigroup, in other words, came in spite of the fact that they were viewed by Moody's as less likely to benefit from government support in future crises such as the one that shook the global economy in 2008.

Gensler's comments:

At the heart of reform is ensuring that the largest financial institutions in our free-market system have the freedom to fail. That was true for my dad's small family business in Baltimore. Nobody would have bailed him out if he didn't make payroll each Friday. That's why I was pleased last month when Moody's removed the uplift in credit ratings of the largest bank holding companies that had come from perceived government support. This is a real testament to the work of the Federal Deposit Insurance Corporation and the Federal Reserve, under the leadership of Chairmen Martin Gruenberg and Ben Bernanke and Governor Daniel Tarullo. The statement, made by Gensler during a speech before the Financial Stability Oversight Council, is slightly ironic since government reliance on the credit ratings duopoly of Moody's and S&P is one of many things blamed for contributing to the crisis. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act attempted to undo the ratings agencies' quasi-official status by requiring federal agencies to review regulations that require references to credit ratings and substitute with other standards of credit worthiness. Nonetheless, as Gensler's comments indicate, public officials are nonetheless all too happy to hold up the credit ratings agencies' views as gospel when it suits their needs.

Gensler's comments underscore the ongoing influence of the credit ratings agencies more than five years after the financial crisis, and more than three years after the passage of legislation aimed at reducing that influence.

That is why shares of Moody's have surpassed their pre-crisis highs, while other subprime crisis losers have been far slower to turn things around. Bank of America shares, for example, are still worth about only a third of their 2006 highs and Citigroup shares are worth about 10% of their peak levels.

-- Written by Dan Freed in New York.

Follow @dan_freed

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