Now I am really going to rant. What is going on here? The financial system is on the verge of a meltdown, we have the Lehman credit default swaps settlement tomorrow, which is a huge test that has investors on Defcon One. Markets are as unhinged as they can be and still be functioning around the margin. So Moody’s decides NOW to put out a possible downgrade alert for Morgan Stanley?
After their DECADES of being slow to downgrade, of almost religiously administering downward revisions after the bond markets had already re-rated the credit on their own, Moody’s decides to become true believers in timeliness when that can have the effect of driving a knife into the markets and giving a twist?
If an investment bank is downgraded beyond a certain level, counterparties stop trading with it because they will get downgraded automatically by virtue of their exposure, Thus concerns over a possible downgrade can lead dealers to start directing business away from a firm that appears to be weakening, creating the beginnings of a run. Morgan Stanley is bigger than Lehman was. After the havoc the collapse of Lehman wrought, Morgan Stanley will not be permitted to fail. But to have that hanging over the markets at this juncture is the worst timing imaginable.
From Bloomberg (hat tip reader Steve):
Morgan Stanley, the U.S. securities firm whose shares dropped 26 percent yesterday, had its long-term credit ratings put on review for a possible downgrade at Moody’s Investors Service.
About $200 billion of long-term debt is affected by the review of Morgan Stanley’s A1 credit rating, Moody’s said in a statement today. The ratings agency affirmed its Prime-1 grade for Morgan Stanley’s short-term debt.
Even though one rating was affirmed, the downgrade shadow is going to rattle some nerves.
Update 12:00 AM: The New York Times reports on the investment bank’s woes:
After briefly beating back those who would bet against Morgan Stanley, the humbled Wall Street giant that he runs, Mr. [john] Mack was once again playing defense on Thursday. His bank came under renewed assault in the stock market, where its share price plummeted nearly 26 percent…..
Once again, questions swirled about the fate of Morgan Stanley, despite the bank’s efforts to quiet them. Short-sellers, those investors who wager against stocks, took renewed aim at the firm. At midnight on Wednesday, regulators lifted a temporary ban on short sales. Mr. Mack had angered many hedge funds by lobbying for the restriction.
Much of the concern centered on Morgan Stanley’s deal to raise $9 billion from Mitsubishi UFJ of Japan. Despite repeated assurances from Mr. Mack and Mitsubishi executives, some investors worry that the decline in Morgan Stanley’s share price, coupled with the steep sell-off in the Japanese stock market this week, might prompt Mitsubishi to reconsider its investment. Morgan Stanley hopes closing the Mitsubishi deal will help ease the burden on its shares the way Warren E. Buffett’s $5 billion infusion helped stabilize Goldman Sachs.
Fears that the deal would not close were evident in the bond market, where Morgan Stanley’s 10-year debt sank to 64 cents on the dollar on Thursday, down from 96 cents a month ago. The price of insuring Morgan Stanley’s debt soared to record heights….
Yves here. So this may explain the downgrade notice, Moody’s does not want to be too far behind the markets. But the fears hinge to a significant degree on the Mitsubishi deal closing. Why not wait till Tuesday to see whether it happens or not?
…assurances about the deal did not assuage nervous investors and analysts who said failure to close the deal could be devastating.
“They need to bring this equity in to restore confidence in the marketplace,” said Brad Hintz, analyst at Sanford C. Bernstein. “It is all about confidence because there is nothing fundamentally wrong with Morgan Stanley.”
However, Mr. Hintz said that if that confidence continued to wane, hedge funds would withdraw balances en masse, counterparties would try to get out of trades and Morgan Stanley could find itself in the same kind of squeeze that hit Bear Stearns, then Lehman Brothers.
In fact, the twisted morass of Lehman’s bankruptcy filing could make things worse, analysts said, because hedge funds and trading counterparties who find themselves owed billions by Lehman could move more swiftly to ensure they do not face similar problems with Morgan Stanley.
Mr. Mack should theoretically be in a much better position to weather the crisis than was Lehman. The bank does not need to tap short-term debt markets, which are currently frozen, until the third quarter of next year. It has reduced its reliance on borrowed money and has about $50 billion in cash and highly liquid securities on its balance sheet. Now that it is a bank holding company (as is Goldman Sachs) Morgan Stanley can borrow directly from the Federal Reserve.
Update 1:10 AM: Moody’s is creating mischief on other fronts, with Goldman. But since Goldman’s debt rating is a notch higher, and the warning (negative watch) is less urgent, this is not (yet) a big deal.
From Bloomberg:
Morgan Stanley’s credit rating may be cut by Moody’s Investors Service, which said the financial market slump may hurt profit at the U.S. securities firm next year.
Moody’s put Morgan Stanley’s A1 long-term credit rating on review for a possible downgrade, according to an e-mailed statement. The ratings assessor also lowered its outlook for Goldman Sachs Group Inc.’s Aa3 long-term rating to negative.
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Yes, irritating. But, they are simply trying to stay relevant. When they cease to be relevant, they cease to exist.
Simple as that. They want to survive.
They won’t.
O HALP
Downgrading MS makes sense if something about the Lehman settlement will be a big hit. For example, if a bunch of hedge funds go under MS may lose a lot of business or even get drawn towards a CDS cascading default itself.
Otherwise, yeah, downgrading now looks irresponsible. Even if Moody’s misses downgrades right now, they can say, believably, they just couldn’t keep up.
Comrade Smith,
Perhaps you should put up extra cute photos this morning for inspiration (early)!
Comrade Holiday,
Great minds work alike. I did have an extra helping of Antidotes planned…will try to get them up earlier than usual.
All executives at Moody’s should be imprisoned in a cell with King Kong and anally raped! These guys were the enablers of the credit bubble in the first place and now they’re dousing a forest fire with gasoline! Assholes!
unless that is…
morgan stanley is meant to fall.
if so, who’s the last xIB standing?
“One thing we must recognize, even with the new Treasury authorities, some financial institutions will fail,” Paulson said.
I really don’t see the issue. If the deal doesn’t close than the downgrade warning is appropriate. If the deal closes then they can remove it. As others have suggested there may be an issue with LEH CDS settlement tomorrow as well. Finally, stories about the prime brokerage being abandoned abound. No one wants to see their funds tied up as in the case of LEH.
It’s really not unreasonable in isolation. Does it pour gas on the fire — perhaps but anyone with a lick of sense knows what’s going on with MS and has laid their plans. My guess is the net effect is really a big 0.
What I think shouldn’t have happened was the removal of the short selling restrictions. It seems clear that the shorts are targeting specific firms — as you would expect. In this environment too rapid price adjustment is a bad thing.
It’s almost as if it were planned…cue conspiracy music.
Anonymous 12:17 sums it up well. I don’t agree with the shorts comment but other than that on the money.
I am not sure cutting anyone any slack at this point in time serves a purpose. If Moody’s has been slow to downgrade in the past (which they have) then they possibly deserve some credit for getting more on top of the situation. It isn’t their job to twist the knife anymore than it is their job to prop up the market. If they are being objective then props to them.
This is irresponsible. I am a lawyer who has been working on subprime for the last six months. The ratings agencies bear a lot of responsibility for this mess. A lot of the CDO's that are blowing up were given the highest rating by Moodys, Fitch and S&P. Also, as Yves stated they have historically been late making calls.
Unless Moodys has a very good reason for doing this (one that escapes me) this action is preposterous.
Yves, here’s the bigger question. How fast does Moody’s generally go from review to an actual decision? Goldman was put on lowered outlook. What is the difference, in terms of time frame to a decision?
Perhaps an even bigger question: what does a downgrade do to collateral requirements of various loan agreements? Is it possible that suddenly the supposed $81 billion they have in cash can just WHOOSH! out the door now? Can this be another weekend of terror?
Please God, I hope not.
First they came for the Bears,
— but I did not speak out
Then the came for the Merrills
— but I did not speak out
Then they came for the Lehmanites
— but I did not speak out
Then they came for the Morganites
— but I did not speak out
And then the came for me
— but Hank F’ing Paulson’s got my back, bitches!
No, but seriously, this weekend’s going to suck.
downgrade the suckers! let them go bust! hope Goldman is next
Given that Moody’s AAA rating of junk started all this, why does anyone care what they say?
Does anyone know what the JPM exposure to the LEH CDS is?
Settling LEH CDS will be a nightmare if at all possible. And perhaps Moodys knows MS won’t survive that. But also the gorilla in the room which is the $1tn of GM CDS which will pay 12c in the dollar at best. Who can honour these debts in these market conditions.
More rating agency collusion and conspiracy to defraud? Where are the investigations of ratings agencies, who without question, are unable to model financial securities or to have trustworthy reputations that can be connected to anything truthful?
The ratings agencies are conduits of fraud which abuse authority — and one thus has to question why Congress or The Senate have not done anything at all to control these entities that threaten the financial stability of America! If the truth be known, Congress and The Senate work for lobby groups that use ratings agencies to contribute to a corrupted political system that depends on fraud from wall street!
This is sweet revenge by the ratings agencies who were coerced into giving top ratings to the toxic waste spewed by these same banks.
Probably just a coincidence that Berkshire is Moody’s largest shareholder.
http://www.cnbc.com/id/24416731
I have a philosophy, but I have been re-evaluating it in the light of reality. What does it say about the whole theory of markets if people blindly followed Moody’s on the way up? You can’t (actually, you can) complaine now about Moody’s downgrade. Finally, this rating may be speeding the demise of MS, but if someone can knock you over with a feather, the problem isn’t the person with a feather – its you.
Matt Dubuque
As I noted in August, the ratings agencies are starting to get very tough and nasty.
This is because of the large number of pending lawsuits against them, including shareholder derivative lawsuits.
Additionally, Henry Waxman is breathing down their neck and Obama has singled them out for particular blame. Recall the horrific fiasco about collateralized proportional debt obligations (CPDOs) at Moody’s that broke over the summer.
That scandal alone could bankrupt the firm when current lawsuits play out. The FT caught them redhanded.
The attorneys for the ratings agencies have advised them that if they don’t get organized QUICKLY, then the entire assets are at risk because of punitive damage awards.
A similar pattern holds for the large accounting firms. Look for dramatic changes when the AUDITED financials come out in January.
This is not a “paranoid” view. It is sober analysis, based on numerous competent data points.
Matt Dubuque
mdubuque@yahoo.comP