Moody’s Investors Service suffered a downgrade of its own as markets responded to the company’s rating cuts yesterday of 15 of the world’s largest banks by bidding up the value of their stocks and bonds.
Shares of all the firms affected by yesterday’s action rose as of 10:18 am in New York, and the cost to protect Morgan Stanley debt against losses dropped to the lowest in more than seven weeks, according to Bloomberg data, after the bank was cut two levels rather than a threatened three grades. Credit-default swaps tied to Bank of America Corp, which was lowered to within two levels of junk along with Citigroup Inc, also improved. The 43-company Bloomberg Europe Banks and Financial Services Index added as much as 1.5 per cent.
“To downgrade a BofA or Citigroup or companies that are sitting on hundreds of billions of dollars of cash in government-backed securities makes no sense,” Richard Bove, an analyst at Rochdale Securities, said in an interview on Bloomberg Radio and Television. “You can forget Moody’s. You should have forgotten them a long time ago.”
| GLOBAL DOWNGRADE Moody's downgraded 15 global banks on Thursday. Below is a summary of old and new long-term ratings for the bank holding companies and operating companies | ||
| Bank name | New rating | Old rating |
| Bank of America | Baa2 | Baa1 |
| Barclays | A3 | A1 |
| BNP Paribas | A2 | Aa3 |
| Citigroup | Baa2 | A3 |
| Credit Agricole S.A. | A2 | Aa3 |
| Credit Suisse | A1*** | Aa1 |
| Deutsche Bank | A2 | Aa3 |
| Goldman Sachs | A3 | A1 |
| HSBC Holdings | Aa3 | Aa2 |
| JP Morgan Chase | A2 | Aa3 |
| Macquarie | A3* | A2 |
| Morgan Stanley | Baa1 | A2 |
| Nomura Holdings | Baa3** | Baa2 |
| Royal Bank of Canada | Aa3 | Aa1 |
| Royal Bank of Scotland | Baa1 | A3 |
| Societe Generale | A2 | A1 |
| UBS | A2 | Aa3 |
| *Moody's downgraded Macquarie Group Ltd to A3 on March 16 from a previous rating of A2; **Moody's downgraded Nomura Holdings Inc to Baa3 on March 15 from a previous rating of Baa2; ***Moody's downgraded Credit Suisse Group AG (the holding company) provisional senior debt to (P)A2 from (P)Aa2, outlookstable; Source: Reuters | ||
Gerard Cassidy, an analyst with RBC Capital Markets, said: “Yes, their ratings are lower, but is Citi tomorrow going to have to pay an extra 50 basis points for commercial paper? I don’t think so.”
The downgrades may have longer-term effects on operations, forcing banks to post more collateral to trading partners in derivatives deals.
The prospect of downgrades had weighed on banks since Moody’s said on February 15 it was reviewing 17 financial firms with capital-markets operations because of fragile confidence and tighter regulations that pinched revenue. By the time the results came out four months later, investors said the worst-case scenario for downgrades was already reflected in securities prices.
“If anything, the market is reacting with relief,” said Thornburg Investment Management’s George Strickland. Morgan Stanley bonds likely will rally, said Strickland, whose firm owns the bank’s debt. “The market is shrugging it off.”
Financial stocks in the S&P’s 500 Index climbed 0.9 per cent at 9:58 a.m. New York time, the biggest gain among 10 industries, according to Bloomberg data. JPMorgan Chase’s 2.3 per cent advance was the biggest in the Dow Jones Industrial Average. Credit-default swaps on New York-based Morgan Stanley declined 20.6 basis points to 360.7 basis points as of 10:03 am in New York, according to data compiled by Bloomberg. That’s the lowest level on an intraday basis since May 4.