Moody's Investors Service, one of the two big ratings agencies, has said it will decide in mid-May whether to lower its ratings for 17 global financial companies.
Some of Wall Street's biggest banks are bracing for fallout from
a possible cut in their credit ratings.
Moody's Investors Service, one of the two big ratings agencies,
has said it will decide in mid-May whether to lower its ratings for
17 global financial companies. Morgan Stanley, which was hit hard in
the financial crisis, appears to be the most vulnerable.
Moody's is threatening to cut the bank's ratings by three
notches, to a level that would be well below the rating of a rival
like JPMorgan Chase.
Bank of America and Citigroup may also fall to the same level as
Morgan Stanley, but those two are helped by having higher-rated
subsidiaries.
Credit ratings are particularly important for financial
companies, which depend greatly on the confidence of their creditors
and the companies they trade with. A high credit rating enables
banks to put up less money, which they can borrow at lower cost,
while a lower credit rating can mean they have to put up more money
and perhaps pay more for their loans.
The three banks that stand to be the most affected by a ratings
downgrade have already said that they would have to put up billions
of dollars more in collateral to back trading contracts.
Having a substantially lower credit rating than rivals, however,
could do much wider damage over time. It could affect billions of
dollars in trading contracts that are an important business for Wall
Street. Many of those contracts demand that the company on the other
side of a trade have a credit rating above a certain level.
The big mutual funds, asset managers and other institutions in
the United States are reassessing their trading relationships in
light of a possible ratings cut. In some cases, contracts are being
rewritten. In others, big investors may walk away.
Weighing the creditworthiness and ratings of banks "is a major
focus at Vanguard and at other buy-side companies who do business
with Wall Street," said William Thum, a lawyer with the mutual fund
giant Vanguard, referring to institutional investors like his
company.
Some of the funds he deals with are prohibited from trading with
banks that have a less-than-sterling credit rating.
"We are now in the process of diversifying our list of trading
partners by signing up new dealers who appear most likely to
maintain relatively high credit ratings," he said.
Not all contracts would be affected by a downgrade from Moody's.
Many also require a similar action from the other major ratings
agency, Standard & Poor's.
But if Moody's does cut as it warned in February, Morgan Stanley,
Bank of America and Citigroup would be rated Baa2 -- just two
notches above speculative, or junk -- and the banks would have
weaker credit ratings than major rivals.
Keith Horowitz, an analyst with Citigroup, says the banks have
had some time to cushion the blow of a downgrade.
"Given large liquidity pools and several years to prepare, we
believe all of the banks are positioned to manage a downgrade," he
said.
