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American Banker Editor-in-Chief Neil Weinberg on the S&P downgrading the credit rating of nine eurozone countries and problems facing Bank of Amer...
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We Begin tonight with breaking news ratings agency Standard and Poor's.
Following through with Eric threat downgrading nine European nations today including.
Europe's second biggest economy France losing its top triple -- credit score just like the US.
Italy and Spain also getting cut joining me now with his -- Neil Weinberg editor in chief of American banker -- welcome.
I guess the good news out of this if there is good news is that Germany's rating didn't get cut its the biggest economy in the Euro zone the most important economy.
They were left alone.
Sure but I think Jerry at this point no one's gonna be overly surprised that European countries are getting their debt downgraded its been obviously factored into stock prices and bond prices for months now as you're got a serious problems.
As a -- themselves even -- debt to this said that they might be doing this so we get a sense it was coming.
What we weren't sure -- -- where it whether even Germany would be key and we -- other GDP actually go down so.
Their economy not looking strong as it has been in the past.
So that was a bit of a surprise that maybe they didn't get taken down to.
But as you look at what's going on here let me read you what S&P said about why they're doing this.
They say policy initiatives taken by European policy makers in sufficiently address systemic stresses.
So they're looking for more but even they say austerity measures aren't enough what is the rating agency saying here were they looking for.
Well I think obviously you've got this circle where the governments are issuing bonds selling to the banks the banks then are.
Sort of recycling it with the the government's so you've got.
These two props both of which are weak which are trying to hold up a house that doesn't.
Obviously stay together so what you have here is a problem where.
You have to cut and cut and cut and if you cut of course you have are going to have a short term reduction in gross domestic product so you have this vicious cycle.
What they ultimately have to do is find that they cut enough that they are running these huge deficits and they continue to grow or that at least that they don't go into a deep recession.
Well at France their their finance minister today say we're we're not going to do any austerity cuts.
What will they do what can they do to change what's going on there.
Well you can't just grow your way out especially in a country like France where you have a huge public sector so the question is what are you going to do.
And if there's showing a lack of willingness to actually cut the deficit and they're not going to have the sort of growth that will bring in more income.
Then obviously S&P is going to say this country's got some serious problems and we're gonna downgrade them.
-- my worry -- that that this is really gonna hurt the US economy.
We've sort of been at a tipping point for awhile it's not clear whether.
You know we're truly expanding again -- or simply walking along the precipice what would be the impact here.
I don't think that the S&P cut itself is gonna have much -- any influence we saw last year when the S&P cut the US triple A credit rating.
The value of US debt actually went up and in the next couple months.
So I don't think that this comes as a surprise it's sort of a lagging indicator but your point Jerry if it turns out that the worst case scenario comes to pass -- Europe.
And it goes into a depression or a very serious recession and we have mass unemployment and we have these countries.
Basically their economies ceasing to function ensure this would have a big knock off effect on the United States.
But possibly not and you -- the point as we were coming into the show.
Just a month ago you said remember the rating agencies and even cut MF global until the day before their bankruptcy sure they're not exactly at the cutting edge of the breaking news and all.
So what we've seen another indication that this is a lagging indicator -- in recent days the yields on European debt have actually gone down in other words investors are getting more sympathy for these countries abilities to maintain their their budgets and.
You can't keep up -- and this -- had a ratings agencies are catching up unfortunately the markets will react to the news.
Eventually and that might not be positive.
I want to talk to about Bank of America story in the Wall Street Journal today apparently the Bank of America.
Told the Federal Reserve that one of -- and emergency policies if they get into real financial trouble.
And this bank has been struggling for some time they might cut a number of bank branches -- make about.
I think that that did something they should probably do before they get into serious they are already planned to do south.
Sure they have -- -- going to be cutting something like 30000 employees that they've announced in past months so.
This is certainly part of a program and they need to consolidate what they're doing they need to become much more profitable bank the expectations are for the fourth quarter -- barely make a profit.
So they have a lot more serious problems than just some branches that are making money but this is certainly -- place that they should be cutting has branches are very expensive.
Bank of America's a national bank so it has a lot of branches out in outlying areas where -- they're just not gonna make money.
Given the high overhead that a bank like they have.
When they're trying to operate.
Publicly.
We just thought -- Bank of America's their strongest markets are weakest markets.
And what you see it it's LA.
It's Phoenix they're a handful of markets in places you might not expect where they're very strong.
One of the problems for these big banks and there are only three national banks now coast to coast.
Is that they have to maintain these very expensive ATM networks and teller you know sponsor -- branches with tellers in them because consumers don't stop for nothing less.
Sure it's very expensive and as we said recently it costs a bank about 350 dollars a year just to keep checking account open which is sort of an indication.
It's expensive to have.
-- customers and if these customers only have a few hundred dollars in your bank.
There's no way that these banks are gonna be able to make money so what they need to do is take a very sharp scalpel and start cutting some of these branches that don't make money.
I wanna show -- the stock price of Bank of America went well below five bucks a share late last year if we could see that full screen that be great.
How how bad are things for Bank of America right now at below five bucks a share -- we see portfolio managers for mutual funds and other investments and you know.
Selling -- both the shares because they can't hold on to them how serious are things does the CEO Brian -- winning hand have to go.
I don't know that he has to go ahead he was dealt a very bad hand and to your point bank stock has lost about 55% of its value over the last year or so obviously.
The market is giving them a big thumbs down.
That said.
And the bad hand that he got with Countrywide Financial which is predecessor had acquired and all these legal tens of millions of -- dollar's worth of legal problems they have related to mortgages.
But he's also made some bad mistakes he had a debit card -- five dollars.
A month that first -- -- gonna implement than they pulled it back he said that he was going to give an increase in dividend and the Fed said you can't do that.
He said he would not issue new shares then they'd said they will be issuing new -- so he's got a few confidence problem certainly.
Ask you this question straight up if you -- if you bank to Bank of America.
-- -- -- -- -- I wouldn't put my money out because I was worried that the bank is gonna go wonder and I'm gonna lose my money.
But I might not be too happy with the service if I was happy with the service then I think I'd stay there and that's one of the things jury -- these national banks -- if you wanna go put your money in a credit union.
You can do that and you can save some money but of course they don't have the branch networks they don't have the ATMs they don't have the add on services so it's a choice that consumers need to make but you might get alone when you need one that's it's a tough -- -- -- --
