BlackRock, the giant money manager, said it would have no choice but to shift some of its business away from certain Wall Street firms if Moody’s Investors Service went ahead with its threat to downgrade some of the country’s biggest banks.
“I think this has serious implications,” Laurence D Fink, the firm’s chairman and chief executive, said in an interview on Wednesday following the release of BlackRock’s first quarter earnings. “If Moody’s does indeed downgrade these institutions, we may have a need to move some business around to higher-rated institutions.” The move, Fink said, is not something he wants to do. But as a giant asset manager, BlackRock has trading agreements that require it to maintain highly rated counter parties. “That’s not my wishes,” he said, in reference to shifting business to other firms. “We have to respond to contracts we have.”
Moody’s, one of the country’s two big ratings agencies, has said it will decide in the next two months whether to lower its ratings for 17 global financial companies. The threat has a number of Wall Street firms on edge. Banks that trade need the confidence of their counterparties, so maintaining a sterling credit is critical.
In many cases, keeping a high rating is written into trading agreements. And already the specter of a downgrade has pension funds and money managers like BlackRock assessing their contractual relationships with these institutions.
Fink did not say which banks BlackRock was concerned about, but a downgrade would no doubt affect some firms more than others.
Morgan Stanley appears to be the most vulnerable as Moody’s is threatening to cut the bank’s ratings by three notches, to a level that would be well below the rating of some other rivals.
Citigroup and Bank of America will fall to the same levels, but both institutions are helped by having higher-rated subsidiaries where large chunks of their trading business is housed.
In the run up to Moody’s decision, many on Wall Street are questioning the wisdom of a potential downgrade. Moody’s, of course, came under criticism for keeping rosy ratings on toxic securities before the financial crisis.
And on Wednesday, Fink said a move to downgrade some big banks was misplaced. “I don’t understand the thinking by Moody’s,” he said. He noted that banks had set aside deeper capital cushions, a sign of strength that could prevent a crisis of confidence from ensnaring the firms. His comments echo those of Goldman Sachs’s chief financial officer, David Viniar, who criticised the rating agency on Tuesday when speaking to analysts about Goldman’s first-quarter earnings. “We think that if you look at every single credit metric there is for Goldman Sachs, and frankly for many of our competitors, none of the actions they have talked about are warranted,” he said.
As for Moody’s, it says the banks are in businesses that may no longer deserve a high credit rating. In recent reports, the agency has raised flags about the “vulnerabilities” of capital markets businesses, including “the confidence-sensitivity of customers and funding counterparties, risk management/governance challenges, and a high degree of interconnectedness and opacity.”
“Additionally, these institutions are exposed to large and rapidly-changing risk positions that expose these firms and their creditors to unexpected, sometimes outsized losses,” Moody’s has said in its reports.
Morgan Stanley declined to comment. A Morgan Stanley spokeswoman had said previously that eight per cent of its over-the-counter derivative trading contracts would be affected by a three-notch downgrade. She said the company had spent more than two years overhauling its business so that it was “less risky and less capital intensive,” something that should help its rating.
© 2012 The New York Times News Service
