Bank of America on S&P’s waiting game…

August 5, 2011

You may have noticed that the markets were a little kerflooey yesterday, what with the Dow dropping over 500 points. And while they’re rebounding slightly this morning, there’s clearly a lot of nervous people out there. As the WSJ explains in this article a lot of the uncertainty is related to a guessing game over whether Standard & Poor’s plans to downgrade the United State’s debt rating, given the last-minute deal on the debt ceiling that was announced earlier this week.

We’ve already written a few posts about how companies were handling debt-ceiling disclosures prior to Tuesday’s deal (including this one last Friday). But we thought it was worth revisiting the topic after reading the nearly 400-page 10-Q that Bank of America (BAC) filed yesterday afternoon. Here’s the part that caught our attention, which was at the top of page 9:

The U.S. government recently increased its borrowing capacity under the federal debt ceiling. However, there continues to be a perceived risk of a sovereign credit ratings downgrade of the U.S. government, including the ratings of U.S. Treasury securities. In July 2011, Moody’s Investors Service, Inc. (Moody—s) placed the U.S. government under review for a possible credit rating downgrade, and on August 2, 2011 it confirmed the U.S. government’s existing sovereign rating, but stated that the U.S. government’s rating outlook is negative. Also in July 2011 Standard & Poor’s Financial Services LLC (S&P) placed its sovereign credit ratings of the U.S. government on CreditWatch with negative implications. On August 2, 2011 Fitch, Inc. (Fitch) affirmed its existing sovereign rating of the U.S. government, but stated that the rating is under review. A downgrade of U.S. sovereign credit ratings could correspondingly impact the credit ratings of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government. We cannot predict if, when or how any changes to the credit ratings of these organizations will affect economic conditions or the resulting impact on the Corporation. Such ratings actions could result in a significant adverse impact to the Corporation.

A quick skim of Bank of America’s other major filings — all of which could easily serve as hefty paperweights — reveals that this warning is new. But equally interesting is the company’s choice of words to describe what is more commonly called material in most other filings. In yesterday’s Q, Bank of America used the phrase 4 times, compared to just twice in the 10-Q that it filed back in early May. In the 10-K, which was filed in February and came in at over 750 pages, the phrase was used 12 times.

Given the recent performance of Bank of America’s stock, no doubt the extra warnings are well-placed. Just using that simple phrase as an indicator to get out of the stock back in February now seems like a very wise choice.

Image source: Jin Lee, Associated Press

It’s Q season and we’re expecting a big Friday night dump later today (there was already a big one yesterday even though it was a Thursday). We’ll be reading all of those filings and giving our best stuff to subscribers to footnotedPro. For more information, please contact todd.serpico@morningstar.com.

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