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    Late last year, as the fallout from the fake account scandal at Wells Fargo was still in full force, rumors began to circulate that the bank could be facing another regulatory smackdown due to reportedly failing to meet its requirements under the Community Reinvestment Act. And Tuesday, the other shoe dropped, as the bank disclosed that it did indeed fail to meet its CRA requirements.

Moody's Downgrades BofA, Wells Fargo

Saying that it expects both banks to need further "systemic support" -- codespeak for government funding -- Moody's Investors Service on Wednesday cut key debt and bank ratings for both Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC). In particular, Moody's cut Bank of America, N.A.'s bank financial strength rating (BFSR) to D from B-, while Wells Fargo Bank N.A. saw its BFSR cut to D+ from a prior B rating. "The downgrades of the BFSR and the preferred stock ratings reflect Moody's view that [the banks'] capital ratios could come under pressure in the short-term, increasing the probability that systemic support will be needed," said Moody's senior vice president, Sean Jones, in a press statement. Read the BofA statement here, and the Wells statement here. In the case of BofA, Moody's said it was concerned that the bank's tangible common equity position would be problematic, given its sizeable preferred dividend and likely high credit costs through 2010. The rating agency said it expects "significant additional loan loss provisions in 2009 and into 2010" and said it could not rule out a distressed debt exchange in the future to boost its common equity position; such a transaction would allow BofA to limit government intervention, Moody's said. "The U.S. government could require Bank of America to suspend its common and preferred dividends in order to preserve capital," said senior vice president David Fanger. BofA CEO Ken Lewis, however, has said that the bank was profitable the first two months of 2009 and would likely post a full-year profit in 2009. In particular, Lewis has singled out the bank's sizeable mortgage business -- which posted a $2.5 billion fourth quarter 2008 loss -- as a star performer that is adding to the bank's improved performance as of late. As for Wells, Moody's made it clear that it sees the Wachovia acquisition as particularly problematic. "Wells Fargo will need to take provisions and merger expenses -- predominantly in 2009 and into 2010 -- against those Wachovia assets that were not marked down on December 31, 2008," the rating agency said. Moody's also suggested that the bank's life-time loss estimate of approximately 29 percent against the legacy Wachovia option-ARM portfolio may not be large enough for realized losses on the portfolio. Like BofA, Moody's suggested preferred shareholder interests would likely suffer in the event of further government intervention at Wells Fargo. On March 6, Wells Fargo slashed its quarterly common stock dividend 85 percent, from $.34 to $.05 per share, in an effort to preserve capital. Wells Fargo lost $2.55 billion during the fourth quarter of 2008. After acquiring Wachovia, Wells holds $247.8 billion in first lien morgages, and $110.1 billion in seconds; $122 billion of the bank's first lien portfolio comes in the form of toxic option ARM loan products. Write to Paul Jackson at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.


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