Bank of America and Citigroup: How Stable, Really?

The debate over whether the nation's largest banks are too big to fail rages on, as does the question of just how much in implicit subsidies these banks enjoy because of this notion. When it comes to Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) , the two megabanks have been found to be much more dependent on TBTF-generated backstops than peers JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) , particularly when it comes to profits -- which would dip into the negative zone for both B of A and Citi if funding subsidies were removed.

Indirect TBTF support aids debt ratings, too
Not surprisingly, tacit advantages exist when it comes to ratings on the biggest banks' debt, as well. A new report by Bloomberg shows that, without such backup, the debt of Wells and JPMorgan would be much less attractive for investors -- and, for Bank of America and Citi, pretty much its entire debt load would make even the pluckiest of investors run for the hills.

What constitutes this particular subsidy? Much as the belief that none of these huge banks will be allowed to fail gives them a funding advantage -- since investors are willing to take lower yields in exchange for lower risk -- a similar boost occurs when it comes to corporate debt. So certain are bank bondholders that the government will always be at the ready to step in if problems arise, that they are willing to accept lower bond yields.

According to World Bank economist Deniz Anginer, the author of a new study that highlights this particular phenomenon, this subsidy has infused an extra $82 billion into the coffers of Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) , as well as B of A, Citi, JPMorgan, and Wells. That's a lot of extra dough, and it's notable that, without it, Moody's estimates that essentially all of Bank of America's and Citigroup's holding company debt would sink below junk status. Things are less dire for Morgan Stanley's and Goldman's debt, but still pretty dicey; JPMorgan would suffer, as would Wells, but they both would still have plenty of investment grade debt to float.

On the plus side, both B of A and Citi got some good news when The Wall Street Journal reported that the cost of insuring against a default at the two bank holding companies dropped this month to its lowest point since the financial crisis. But, as the Bloomberg articles shows, these two banks still have a long way to go.

Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2458384, ~/Articles/ArticleHandler.aspx, 8/20/2014 9:15:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement