Moody’s has been threatening for some time now to downgrade banks in the US on their credit ratings. Today Morgan Stanley (NYSE:MS) revealed that if its credit rating was downgraded it would face huge costs. The company stated that a decisive move by the ratings agency would obligate the financial institution to $7.2 billion i collateral to counterparties. That figure is based on a downgrade of 3 places on the company’s credit.
Other banks that have been threatened by the ratings agency include Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C). Bank of America has estimated that a one notch cut would force them to put up $2.7 billion in collateral while Citigroup’s estimate for a fall of two place is put at an extra $4.7 billion in collateral. The release of figures such as these may seem terrifying to shareholders but doesn’t seem likely to sway Moody’s position.
The agency, speaking on Morgan Stanley, pointed to the firm’s cash reserves as evidence that a downgrade would not put it in an essential or instantaneous danger. The real danger evidenced by the downgrade would be a change in the attitudes of customers toward the investment banks on seeing their downgrades.
Late last month Moody’s warned Wells Fargo Company (NYSE:WFC) that it’s moves into the prime brokerage business could initiate a downgrade of its rating. Their acquisition of the prime brokerage business Merlin was ominously called “credit negative” by the ratings agency.
Moody’s has a massive amount of sway on Wall Street and since the early spring it has been using it to battle with the major investment banks. In February the company released a report that warned of a review of all of the major players in investment banking. The report cited problems in just about every aspect of the investment banking sphere as risky.
This quarter’s earnings have not been kind to investment banks and the results will only fuel Moody’s speculation of their risks. The firm has pointed to fee structures, advice on mergers and compensation packages among countless other factors as reasons the sector is riskier now than it had been before.
Investment banking seems to be undergoing a change. Many of the firms are restructuring their businesses and reducing their work forces in order to restore balance. Moody’s does not seem appreciative of the efforts and their current recalculation of the risks involved in the industry could have severely negative effects going forward.
