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Bove: Moody's Downgrades are Too Late

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    Rochdale Securities analyst Dick Bove weighs in on Moody's bank downgrades.

  • Duration 4:02
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Some fifteen minutes while -- heard about it first here.

At this time yesterday on Fox Business Charlie Gasparino.

Have first word that Moody's would downgrade the big banks to -- up the ratings firm did just that last evening.

We're joined right now but -- but -- -- -- authorities to call these downgrades quote.

-- search Charlie I just spoke with -- yesterday -- but you're saying that these banks are in great positions what was Moody's thinking.

-- in other words let's approach it from a from a different standpoint we know that the deposits are rising rapidly in the banking system.

We also know that bank balance sheets is not expanding because of the capital ratios.

So the net effect is these deposits -- pouring in.

And the size of the bucket is not getting bigger so what are the banks doing with the deposits they're paying off their debt.

So that -- is shrinking and visited -- shrinks that creates a problem for investors because if you had been you know consistently lending money to a bank.

And now all of a sudden the bank gives you money back would -- do with the money.

Particularly if you want to put it into another bank right so there's actually a shortage of certain instruments out there.

And that means that the yields on bank debt are going down.

Aren't well at least I get -- sorry go ahead go ahead.

It would -- Moody's comes along and says it's riskier to put your money into bank debt.

So we're gonna downgraded OK so let me ask it just -- -- get the kind of the -- -- somebody's -- because I was looking at the weakest banks.

Obviously the -- one of them is Bank of America and that is stock that you and I talked about repeatedly.

On the show were you surprised at all that Moody's took the -- at Bank of America as well as a Morgan Stanley Citi and RBS.

Well you know it's it's it's surprising in the sense that if a company has you know more cash.

And government securities on his balance sheet and it has equity which is the case of both.

Bank of America and Morgan Stanley it's it's hard to assume that you know that company's not going to be able to.

Repay its debt right now those were not talking about equities now we're talking about the ability.

To service the debt and Bank of America not only has seen this huge increase in deposits and I'm talking about.

But it's it's eliminated all of its short term debt.

Which is you know not not backed by some sort of collateral so you know in other -- the bank is reducing the size of its debt aggressively.

It's building up its cash aggressively.

It has more cash and government securities and it has equity.

What why why would you assume that it cannot pay back its debt our service its debt today.

We're as it could do so 612 months ago before Moody's downgraded -- What you know -- -- we did the Fed did stress tests on the banks and and you and I again we -- on the program during that a particular partner history this year.

And and that that was you know 13% unemployment.

You know the housing down point 1% prices anyway meet all of that.

Why didn't -- just kind of believe what the Fed stress -- told us which was that the banks do have enough capital the banks could -- withstand the recession.

Hear what I mean it's it's it's a little bit confusing because.

Moody's really is not looking at the individual banks in doing this downgrade what they're looking at is the industry in this saying I don't like this industry.

I don't like this industry because it's highly cyclical I don't like it because.

It doesn't control its destiny it doesn't -- interest rates it can't determine whether the economy's going to be stronger week.

It doesn't know it's gonna get hit by some off the wall situation like Europe.

So because the volatility of the business is so great I don't think any of these banks deserve high ratings and that -- That decision should've been made four years ago.

-- -- before I let -- go yes or no answer here in your opinion do you think that lending is gonna get tougher.

On the heels of this downgrade.

No I don't I think there's actually living is gonna get easier because they think the -- regulated -- -- starting back up.

-- of -- great to talk to you on this topic Dick thank you very much.

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