Wednesday, Moody's Investors Service, on a review commenced on March 4, 2009, slashed the debt rating of Bank of America Corp. (BAC) and Wells Fargo & Co (WFC), and downgraded the preferred stock rating of both the banks to junk category.

Charlotte, North Carolina-based Bank of America's senior debt rating was lowered to A2 from A1 and the senior subordinated debt rating was cut to A3 from A2. In a similar move, the San Francisco, California-based Wells Fargo & Co.'s senior debt rating was lowered to A1 from Aa3 and the senior subordinated debt rating was slashed to A2 from A1.

The more modest downgrades of Bank of America and Wells Fargo's deposits, senior debt and senior subordinated debt ratings are based on Moody's expectation of very high systemic support for these instruments. Moody believes that such a support would likely benefit all depositors and senior and senior subordinated debt holders of the bank and the bank holding company. Moody infers that such a support, however, could be potentially harmful to preferred stock investors.

Moody's downgraded the preferred stock rating of Bank of America to B3 from Baa1. The downgrade was based on the view that if Bank of America were the recipient of additional capital support from the U.S. government, that support could be accompanied by the suspension of dividends or even a distressed exchange by which preferred investors may be compelled to exchange their preferred stock for common stock.

The rating agency, similarly downgraded the preferred stock rating of Wells Fargo & Co. to B2 from A2.

Bank of America's junior subordinated debt rating was cut a notch lower to Baa3 from A2 and for Wells Fargo the rating was lowered to A3 from A1. Moody's believes that the cumulative nature of the interest on such instruments reduces the incentive to defer interest. However, the rating incorporates the view if there is an unexpected need for further government support, the risk of deferred payment on these instruments could increase.

Moody's lowered the bank financial strength rating or BFSR of Bank of America to D from B-. BFSR, which represents bank's intrinsic safety and soundness, for Wells Fargo Bank N.A. was lowered to D+ from B. The downgrades of the BFSR and the preferred stock ratings reflect Moody's view that capital ratios of both banks could come under pressure in the short-term, increasing the probable need for systemic support.

With regard to Bank of America, Moody stated that downgrade of the BFSR is driven by the capital challenges, made more acute because U.S. banks access to the equity market is shut or very limited at best. The rating agency believes that this increases the likelihood of a capital initiative by the U.S. government to support Bank of America in the event that its tangible common equity position deteriorates further. The BFSR is intended to express an opinion about the likelihood of such an event.

The negative outlook on the BFSR, as well as on the preferred stock and trust preferred ratings, reflects Moody's view that Bank of America remains vulnerable to further declines in its tangible common equity due to rising credit losses.

Moody while providing a similar explanation to the downgrade of Wells Fargo's BFSR also said that the bank's comparatively low capital ratios, especially its tangible common equity ratio, result from its acquisition of Wachovia. In Moody's opinion, the amount of equity that Wells Fargo raised was modest in comparison to the amount and quality of assets it acquired from Wachovia.

Moody's does not expect Bank of America and Wells Fargo to generate sizable amounts of capital until the second half of 2010, at the earliest.

In the case of Bank of America, ratings outlook is stable for the bank deposit ratings, as well as for the senior debt and senior subordinated debt ratings at both the holding company and the bank subsidiaries. The outlook for the BFSR and the ratings on junior subordinated debt and preferred stock is negative.

All ratings to Wells Fargo have a stable outlook except for the BFSR and preferred stock rating, where the outlook is developing.

The changes in the rating had no impact on the FDIC-guaranteed debt issued by Bank of America. That debt maintains its rating of Aaa with a stable outlook. Similarly, the FDIC-guaranteed debt issued by Wells Fargo was rated Aaa with a stable outlook.

Wells Fargo closed Wednesday's trading at $16.42, up $0.92 or 5.94%, on a volume of 217.59 million shares on the NYSE. In after-hours, the stock gained 2 cents or 0.12%, trading at $16.44.

Bank of America closed Wednesday's trading at $7.70, up $0.48 or 6.65%, on a volume of 619.16 million shares on the NYSE. In after-hours, the stock gained $0.08 or 1.04%, trading at $7.78.

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