Morgan Deemed ‘Winner’ in Moody’s Bank-Rating Massacre

Separately, Moody’s said of that action, “The current rating level and outlook incorporate a degree of expected further deterioration in the bank’s operating environment and the likelihood that changes in investors’ sentiment could further weaken its standalone credit profile.” In its statement, Moody’s added, “Any reduction in the likelihood of systemic support for large U.K. banks could exert downwards pressure on the Lloyds’ ratings.”

Some of the banks struck back, criticizing Moody’s and suggesting that investors would be better served to seek data on institutions elsewhere, Bloomberg reported. Citibank in particular issued a statement that said in part, “Moody’s approach is backward-looking and fails to recognize Citi’s transformation over the past several years. Citi believes that investors and clients have become much more sophisticated in their credit analysis over the past few years, and that few rely on ratings alone—particularly from a single agency—to make their credit decisions.” Other banks challenging Moody’s include Morgan Stanley, Bank of America and Royal Bank of Scotland. Moody’s said that those three plus Citi, which were all recipients of taxpayer bailouts, have a history of “high volatility” and problems with risk management.

Citi was not the only bank to term Moody’s action “backward-looking.” In its statement, RBS also called the ratings agency’s move “backward-looking” and added that it “does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile.” RBS dismissed the action, saying, “The impacts of this downgrade are manageable.”

That “backward-looking” assessment seems to be shared by a number of financial professionals. Ken Fisher, founder and CEO of Woodside, Calif.-based Fisher Investments, which has about $44 billion under management, was quoted in the report saying, “Moody’s is not going to detect some problem in advance and move a rating to warn the public. Whether it’s a stock or a bond, the free market already did that. Moody’s goes along afterwards and effectively validates what the market’s already done.”

The action could, however, compel firms to pay more to borrow, as well as force them to put up more collateral against derivative trades.

For its part, Morgan Stanley said the downgrade failed to account for steps it has taken to improve its financial position.

“While Moody’s revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years,” said the company in a statement. “However, their acknowledgment of our long-term partnership with [Mitsubishi UFJ Financial Group] as well as our industry-leading capital and liquidity highlight some of the transformative steps we have taken. With our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders.”

———-

Check out As Morgan Stanley Loses Another Team, Is It ‘Under Siege?’ at AdvisorOne.