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Stocks soar as world's central banks move to support big banks just hours after S&P downgraded them
11/30/2011 12:15 pm EST
Hours after Standard & Poor’s downgraded 16 of the world’s biggest banks—largely because the company’s new model for awarding credit ratings decided that governments were less likely to support their big banks—six of the world’s central banks, led by the U.S. Federal Reserve, came to the support of the world’s big banks.
In a coordinated move the central banks lowered the cost of emergency dollar funding by 0.5 percentage points. By lowering the cost of dollar funding from the central banks, the move will make it easier for stressed European banks to fund their dollar-denominated activities. The cost to European banks to fund in dollars had climbed to the highest level in three years.
On the news of the central bank move, the German DAX Index was up 4.9%, and the U.S. Dow Industrial Average had climbed by 3.7% and the Standard & Poor’s 500 by 3.6% as of 11:45 a.m. New York time.
Shares of the banks that S&P downgraded yesterday are performing even better. JPMorgan Chase (JPM) is up 6.4%, Bank of America (BAC) is up 4.6%, Citigroup (C) is up 6.1%, Morgan Stanley is up 7.1%, and the ADRs (American Depositary Receipts) of Spain’s Banco Bilbao Vizcaya (BBVA) are up 7.1% as of 11:45 a.m. in New York.
Joining the Federal Reserve in the move were the European Central Bank, the Bank of Canada, the Bank of England, the Bank of Japan, and the Swiss National Bank. The six banks also agreed to extend swap programs to provide funding in any of their currencies should market conditions require. The current swap lines were set to expire on August 1, 2012. The new lines extend through February 2013.
In all fairness to Standard & Poor’s today’s move by the world’s big central banks would have been hard to time and didn’t have anything to do with the company’s downgrades. But the juxtaposition does raise an important question: S&P has come under fire for not anticipating the risks in sovereign debt in its past ratings of Greek, Portuguese, Italian, etc. bonds. The new model that inspired yesterday’s downgrades is a response to that criticism. But as critics of the three biggest ratings companies have pointed out, political analysis hasn’t been strength of these companies in the past. A new ratings model that purports to include such political judgments—and a political judgment was at the heart of S&P’s downgrade of the United States to AA from AAA after the debt ceiling battle—risks stretching S&P beyond its competencies.
At least that’s what the amazing juxtaposition of downgrades and central bank actions today argues to me.
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