The market didn’t like the Federal Reserve’s “Operation Twist” plan. I don’t quite know what else they were expecting, but the market fell pretty hard on the news. Long-term Treasuries were down and short-term yields were up, which is precisely what Operation Twist is meant to achieve. Now we’ll see if it translates into any results.

Also hurting the market today is the fact that Moody’s downgraded the ratings of major banks, including the embattled Bank of America.

The rating firm downgraded BofA’s short- and long-term credit ratings. In part, Moody’s says the downgrade resulted from the waning implicit government support for big banks including Bank of America.

The credit-rating firms have been warning seemingly forever that with the U.S. government (in theory) less likely to bail out big banks in the future, the banks’ credit ratings might be too high. But Moody’s hadn’t pulled the trigger on its warning — until now.

In addition to BofA, Moody’s cut Wells Fargo and Citi’s credit rating as well. I’m not sure I agree with their political analysis, that the government will no longer support bailouts. But I do agree that the credit of these big banks should go down. The reason is their mortgage liability, something the federal government cannot really help them with. State courts and state regulators have to solve what is primarily a state problem, perhaps with an assist from the federal judiciary. If there was a chance for the feds to go poof and make the mortgage mess go away, believe me, they would have done it by now. The problem is they’re stuck, from a jurisdictional standpoint and also from a liability standpoint. The estimate is that the banks have already lost upwards of $60 billion on the foreclosure fraud and mortgage crisis, and the biggest settlements or enforcement actions or court rulings haven’t even been made yet. The money just isn’t there to save these companies.

Bank of America stock slumped on the news and finished off 7%. I don’t want to cheer anything the rating agencies do – they still get a lot wrong – but this just adds to BofA’s woes. The death watch continues.

David Dayen

David Dayen