(RTTNews) -  Tuesday, Standard & Poor's lowered its ratings outlooks for both Citigroup Inc. (C: News ) and Bank of America Corp. (BAC: News ) to negative from stable, citing uncertainty about the U.S. government's willingness to bail out bond holders in the event of another bailout of the banks.

At the same time, the ratings agency affirmed the counterparty credit and debt ratings of the banks and raised the ratings on Citi's hybrid capital issues, excluding preferred stock, to BB- from B+.

Standard & Poor's credit analyst John Bartko said, "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."

"We previously stated our belief that the extraordinary support was temporary," he added. "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."

Standard & Poor's cited the House bill H.R. 4173 passed in mid-December as an effort to specifically preclude the government from making company-specific bailouts.

The bill allows the government to use public funds to assist in winding down an ailing financial institution only if the ailing institution's debt holders incurred losses, the agency noted.

In addition to the House bill, Standard & Poor's also referred to the proposed Financial Crisis Responsibility Fee and said it underscores the extent to which the political climate may affect bond holders of these companies adversely.
Standard & Poor's said the upgrade of Citi's hybrid capital issues reflects the improvement in Citi's stand-alone credit profile.

"We believe that the risks to hybrid issue investors are diminished given Citi's improved capital position and significantly lower reliance on hybrid capital, compared to one year ago," Standard & Poor's said.

While Standard & Poor's outlook for both Citi and Bank of America is negative, its ratings for the companies is currently enhanced by three notches to reflect the potential for additional extraordinary government support, should this be necessary.

The agency said the counterparty credit rating and stand-alone creditworthiness may converge at the current stand-alone profile level if it became necessary to remove enhancement for government support as a rating factor.

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