S&P says ‘Too big to fail’ mentality over

Standard & Poor’s Ratings Services lowered its expectations for Bank of America Corp. and Citigroup Inc. from “stable” to “negative” on Tuesday, signaling to creditors and bond holders  that the U.S. government is unlikely to rescue them if they go under again.

It did, however, keep the banks’ credit and debt ratings at A for Citigroup, and A-1 for Bank of America – indicating they have a “strong capacity” to pay back debts over time, but remain more vulnerable to an economic downturn than companies with higher ratings at AA and AAA.

“The outlook revision reflects our increased uncertainty about the U.S. government’s willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that benefits debt holders,” the agency announced. “We previously stated our belief that the extraordinary support was temporary. We believe markets are beginning to stabilize and the U.S. government is seeking ways to reduce the potential for moral hazard and systemic risk associated with large financial institutions.”

S&P analysts said Congress is now seeking to reduce taxpayer exposure to future systematic failures, and cited a recently passed House bill that penalizes bond holders if the government uses taxpayer funds to rescue their investments.

The government pumped $90 billion into Citi Group and Bank of America ($45 billion each) during the 2008 Big Bank Bailout.  Bank of America repaid all $45 billion of its loan in December; Citi repaid $20 billion, and converted the remaining $25 billion into stock last fall.

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