Moody's Downgrades 15 Big Banks

Posted by - Friday, June 22nd, 2012

Fifteen world banks were downgraded yesterday by Moody's Investors Service, following up with its announcement back in February that this could be the case.

As global economic uncertainty remained heightened due to pressure in the eurozone and confidence in big banks lagged, Moody's planned to adjust the ratings of up to 17 banks. But as the downgrades for 15 of these banks came through, one can't be too shocked. There really was no other alternative.

From Bloomberg:

“Moody's is not going to detect some problem in advance and move a rating to warn the public,” said Ken Fisher, chief executive officer and founder of Woodside, California-based Fisher Investments, which has about $44 billion under management. “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.”

After four months of notice, everyone had time to prepare. And all of the downgrades fell within the one-to three-notch range Moody's predicted.

By now, as George Strickland of Thornburg Investment Management Inc. said, securities prices and the market as a whole had already been acting as though the downgrade happened. It isn't going to change much:

“If anything, the market is reacting with relief.”

The downgrades occurred in three groups. On the lowest tier were Morgan Stanley, Bank of America, Citigroup, and Royal Bank of Scotland. These groups, said Moody's, were struggling with “problems in risk management or a history of volatility.”

Falling in the middle were the majority of the banks. Barclays, BNP Paribas, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Societe Generale, and UBS often relied too much on the capital markets.

At the top were HSBC, Royal Bank of Canada, and JPMorgan, considered strong safe havens in comparison.

Morgan Stanley and Citigroup did not agree with the downgrades, calling the actions “arbitrary” and seeing them as unfair assessments.

Moody's decided to go ahead with the rating to reflect how the banks handle their debts. Global banking managing director Greg Bauer said in a statement:

“All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities.”

Markets were moderately affected by the downgrade, and banks like Citigroup are trying to urge worried investors to seek other sources for a second financial opinion on the matter...

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