Fears that the recession may drag on longer than anticipated, made investors nervous and impacted negatively on Wall Street at the beginning of the week. A tech rally on Wednesday boosted the Nasdaq composite index with a gain of 0.7 percent. However, news of credit rating cuts for US banks caused financials to slide, dragging the Dow Jones industrial average with it, ending the day with a 0.1 percent loss, with a similar loss being recorded by the Standard & Poor’s 500.
A major overhaul of the manner in which the US financial system is currently regulated has been proposed by President Obama. Anticipation of tighter controls and more difficult operating conditions for financial institutions, along with the strong possibility that loan losses will increase, prompted Standard and Poor’s to cut its credit ratings on 18 US banks on Wednesday. In addition to a credit rating change, a number of the affected banks were declared to have a negative outlook, indicating that their credit ratings may well decline even further. Banks affected by the credit rating cuts include Capital One Financial Corp., BB&T Corp., Regions Financial Corp., Wells Fargo & Co., Associated Banc Corp., Carolina First Bank, Astoria Financial Corp., Citizens Republic Bancorp Inc., Fifth Third Bancorp, Comerica Inc., KeyCorp, Huntington Bancshares Inc., Synovus Financial Corp., US Bancorp, Whitney Holding Corp., Webster Financial Corp., and Wilmington Trust Corp.
A cut in credit rating makes it difficult to access credit, as well as making it more expensive to borrow money. Additionally, a low credit rating impacts on investments in the company’s debt due to the fact that some institutional investors will only hold debt rated at a predetermined level. Of the banks affected, five (Citizens Republic Bancorp, Carolina First Bank, Huntington Bancshares, Whitney Holding Corp and Synovus Financial) were downgraded to ‘junk’ status.
The majority of the Obama administration’s plans will need to be legislated to come into effect and Treasury Secretary Tim Geithner will be detailing the proposal and answering questions on Capitol Hill on Thursday. It is being proposed that some key agencies have their roles redefined in an effort to tighten the government’s supervision of the financial sector. Obama is calling for the Office of Thrift Supervision, which oversees savings and loans, to be done away with and its role to be taken over by the Office of the Comptroller of the Currency, the overseer of national banks. This controversial move would do away with banks having the ability to shop around for the most lenient overseer under the federal thrift charter – a situation which is believed to have been a factor behind the current financial crisis. Main Street will benefit from a new consumer watchdog agency to advise and protect consumers with regard to mortgages, credit cards and other loans.
