A Sober New Reality in Credit Downgrades for Banks
Saturday, June 23, 2012 at 02:09PM NY Times
When a consumer’s creditscore drops, it is hard to recover financially. Wall Street firms could face the same fate.
Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup all suffered credit ratings cuts on Thursday. The rating agency Moody’s Investors Service said that, even though these banks had moved to strengthen their operations, their core trading businesses contained structural weaknesses.
In other words, the downgrades reflect the new sober era for Wall Street.
Since Moody’s put the banks on warning in February, the firms have had time to brace themselves and the immediate impact of the cuts is not likely to be drastic. But banking industry analysts say they think Moody’s actions will cause lasting pain.
“It will make life more difficult for the banks over the long run,” said Andrew Ang, a professor of business at Columbia Business School. “The effect of ratings is pervasive.”
Ratings at Bank of America, which owns Merrill Lynch, and Citigroup, which has a large investment bank, were cut to Baa2. At that level, their creditworthiness is at the lower end of the investment grade, just two levels above junk. Morgan Stanley was downgraded to Baa1, three notches above junk, and Goldman was reduced to A3, four notches above junk.
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