Moody's Downgrades Banks
As was long foreshadowed, Moody’s rating service has cut the ratings of just about every large U.S. banking firm last Thursday. Although the banks opened lower to start off the week, the share prices were relatively stable during the days of the Moody’s announcement. Primarily because the ratings cut have been priced in as it was public knowledge for some time now that Moody’s was going to go through with a downgrade.
What issues does a rate cut present? Well, it primarily affects institutional investors; most pension funds, endowments, etc. require that their capital is allocated to bonds and equity of investment grade entities. However, when a downgrade of this magnitude occurs, the pensions and endowments are no longer able to hold assets that are not investment grade due to the legal requirements of the funds and are forced to sell any of their holdings that do not meet the criteria.
The problem for the banks is that after a downgrade their cost of capital goes up, so it costs more money to run day to day operations, therefore, firms have to tighten up their policies on how to deploy their capital as it becomes more scarce. Another factor is that banks will have to post higher collateral when entering into new contracts.
Moody’s is saying that these downgrades are primarily based on capital requirements and the results of stress testing the banks for potential systemic shocks. However, if you think about it, most banks that have been working over the last few years to become compliant with the tiered Basel liquidity standards are now for the most part much better capitalized than they were before 2008 when their ratings were high. Part of me thinks that this is an aggressive move by Moody’s to ensure that they don’t get burned like they did by the AAA rated sub-prime mortgage CDOs back in 2007 more than any structural fault that they see in the banks.
Finally Business Week reports that Moody’ is planning to cut the ratings on several Spanish banks, for the second time in less than six weeks. There is a ton of chatter on the various finance forums and media outlets regarding these downgrades and many experts have different consequences that are a result of bank downgrades. Do you all think that the downgrades are a bunch of fluff? Or are there other negative issues that they will possibly cause other than what I have mentioned?
Primary Sources:
Reuters
Business Week
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Part of me thinks that this
Part of me thinks that this is an aggressive move by Moody’s to ensure that they don’t get burned like they did by the AAA rated sub-prime mortgage CDOs
good, they are finally doing their job
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One for the finance boffins -
One for the finance boffins - JP Morgan holds more debt than MS, but they were able to "hide" their debt by transferring it to another legal entity (their commercial banking division). Everyone knows this happened, knows they have more exposure than MS, yet they weren't downgraded.
This seems like fraud to me, like a scam to fool the markets. Can anyone comment on whether this apparently selective downgrade makes any sense from a financial perspective?
But Rhaegar fought valiantly, Rhaegar fought nobly, Rhaegar fought bravely.
And Rhaegar died.
Anomanderis: One for the
One for the finance boffins - JP Morgan holds more debt than MS, but they were able to "hide" their debt by transferring it to another legal entity (their commercial banking division). Everyone knows this happened, knows they have more exposure than MS, yet they weren't downgraded.
This seems like fraud to me, like a scam to fool the markets. Can anyone comment on whether this apparently selective downgrade makes any sense from a financial perspective?
I don't think you or most people on street have read the press release. JPM has a retail funding base that despite the higher leverage provides significantly more cushion. In stupid words, yes JPM may have more debt but has more assets earnings to cushion hence a lower leverage ratio than MS. MS has no retail base but relies primarily on wholesale funding ie short term paper, bonds, discount window etc. It is already clear from the prior crises that when shit hits the fan these markets dry up and serve an unreliable source of liquidity. The fact is that all banks are insolvent as those even with a retail base continue to rely strongly on back stop funding from central banks and it is a model that can not continue indefinitely.
monaco1: Anomanderis: One
One for the finance boffins - JP Morgan holds more debt than MS, but they were able to "hide" their debt by transferring it to another legal entity (their commercial banking division). Everyone knows this happened, knows they have more exposure than MS, yet they weren't downgraded.
This seems like fraud to me, like a scam to fool the markets. Can anyone comment on whether this apparently selective downgrade makes any sense from a financial perspective?
I don't think you or most people on street have read the press release. JPM has a retail funding base that despite the higher leverage provides significantly more cushion. In stupid words, yes JPM may have more debt but has more assets earnings to cushion hence a lower leverage ratio than MS. MS has no retail base but relies primarily on wholesale funding ie short term paper, bonds, discount window etc. It is already clear from the prior crises that when shit hits the fan these markets dry up and serve an unreliable source of liquidity. The fact is that all banks are insolvent as those even with a retail base continue to rely strongly on back stop funding from central banks and it is a model that can not continue indefinitely.
I feel the line "I don't think you or most people on street have read the press release" was unecessary and smug, but thanks for the explanation.
But Rhaegar fought valiantly, Rhaegar fought nobly, Rhaegar fought bravely.
And Rhaegar died.
Anomanderis: monaco1: Ano
One for the finance boffins - JP Morgan holds more debt than MS, but they were able to "hide" their debt by transferring it to another legal entity (their commercial banking division). Everyone knows this happened, knows they have more exposure than MS, yet they weren't downgraded.
This seems like fraud to me, like a scam to fool the markets. Can anyone comment on whether this apparently selective downgrade makes any sense from a financial perspective?
I don't think you or most people on street have read the press release. JPM has a retail funding base that despite the higher leverage provides significantly more cushion. In stupid words, yes JPM may have more debt but has more assets earnings to cushion hence a lower leverage ratio than MS. MS has no retail base but relies primarily on wholesale funding ie short term paper, bonds, discount window etc. It is already clear from the prior crises that when shit hits the fan these markets dry up and serve an unreliable source of liquidity. The fact is that all banks are insolvent as those even with a retail base continue to rely strongly on back stop funding from central banks and it is a model that can not continue indefinitely.
I feel the line "I don't think you or most people on street have read the press release" was unecessary and smug, but thanks for the explanation.
yes it was my apologies
+1. No worries.
+1. No worries.
But Rhaegar fought valiantly, Rhaegar fought nobly, Rhaegar fought bravely.
And Rhaegar died.
Don't forget about the effect
Don't forget about the effect of the downgrades on the roughly $64 billion in LOC/SPA-backed municipal securities... mostly held by money market funds, etc... I'm not sure if that number includes TOBs as well... anyway, it's not just the investors in the bank's direct securities that were affected...