Matt Taibbi Thinks That The Big Wall Street Banks Are About To Enter A Death Spiral

matt taibbi

We haven’t been hearing a lot from Matt Taibbi lately because he’s on deadline.

But he took a break from his furious writing to comment on this week’s bank earnings and the impending Moody’s downgrade of a few of the major Street players — BofA, Morgan Stanley, Goldman and Citi.

We know that earlier this week, Black Rock’s Larry Fink said that if some of these banks were downgraded, his massive asset management firm would have to stop doing business with them — they have stringent rules about ratings, you see.

To Taibbi, that’s a nail in the coffin. From Rolling Stone:

when big money players stop trading with those firms, that’s when the death spirals begin.

Morgan Stanley in particular should be sweating. They’re apparently going to be downgraded three notches, where they’ll be joining Citi and Bank of America at a level just above junk. But no worries: Bank CFO Ruth Porat announced that a three-level downgrade was “manageable” and that only losers rely totally on agencies like Moody’s to judge creditworthiness. “A lot of clients are doing their own credit work,” she said.

As for the bank earnings, Taibbi focused on the bank he hates the most (right now)— Bank of America. It just so happens that, if you read BofA’s Q1 earnings report closely enough, it says the government forced the bank to reclassify some of its debt.

During 1Q12, the bank regulatory agencies jointly issued interagency supervisory guidance on nonaccrual policies for junior-lien consumer real estate loans. In accordance with this new guidance, beginning in 1Q12, we classify junior-lien home equity loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. As a result of this change, we reclassified $1.85B of performing home equity loans to nonperforming.

So yeah, basically Taibbi’s point (h/t to ZeroHedge who gave him a heads up on this) is that BofA tried to pass off a bunch of non-performing loans as gold. The government may have caught a batch of those, but how many batches are there, really?

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