The Breakdown

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Banking on a Moody's credit downgrade of Morgan Stanley

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33887 full

How do you think it would feel to be cut not one, not two, but three levels on your credit score? All at once? 

If you answered, "Not too good!" then you're in the same boat as Morgan Stanley, one of the last two big independent U.S. investment banks (the other one is Goldman Sachs, and neither are as proud as they once were, after converting themselves to bank holding companies during the financial crisis so that they could get more money from the government). Moody's, one of the three main rating agencies, has said that it may knock Morgan down three notches. It may take other banks, such as Goldman, down two.

This is from Bloomberg:

The potential downgrades, which may raise borrowing costs and force banks to increase collateral, put the ratings company at odds with bond investors, who are sticking with bets that new capital rules and trading limits will make the financial firms safer in the long run. Funding costs have climbed for banks worldwide as Greece’s debt woes roil markets.

“In the next two years, these big banks will be less robust than they used to be, that’s for sure,” Jim Antos, a Hong Kong-based financial analyst at Mizuho Securities Co., said by telephone. “For any bank that has to raise capital today, it’s already very difficult. This makes it just that much more expensive and difficult.”

Morgan would be in slightly precarious territory if Moody's makes good on its warnings. In corporate-creditspeak, Morgan is now at "A2" on the Moody's scale. A downgrade would take it to "Baa2," which is "the second-lowest investment grade," according to Bloomberg. And you don't want to not be investment grade.

This news is just an indication of the overall constriction of the finance sector. Morgan is hardly alone. Both U.S. and European banks are feeling the credit-ratings lash, due largely to the volatile, difficult captial and debt markets that now prevail. Dodd-Frank and the so-called "Volcker Rule" are coming into focus. And the Euro crisis continues to threaten...well, everybody. 

Of course, as Bloomberg points out, this could be a bit shortsighted on Moody's part. Sure, it's better for the ratings agencies to be conservative — they didn't exactly cover themselves in glory as they serially overrated mortgage-backed securities in the run-up to the housing implosion. But Moody's and others may have overcompensated for past ills. Banks won't be able to load up on risk in the same way they did during the boom years. And over time, this should make them more boring and more stable. So the bond markets may continue to find themselves at odds with the rating agencies.

Follow Matthew DeBord and the DeBord Report on Twitter.

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