S&P Slashes Ratings Of Wall Street Banks
As reported by Christine Harper on Bloomberg.com and Kathy Shwiff at The Wall Street Journal on June 2, Standard & Poor’s (S&P) cut credit ratings for three investment banks, Lehman Brothers, Merrill Lynch, and Morgan Stanley. As a result, the firms say that they may have to book more write-downs on devalued assets.
Morgan Stanley, which is the second largest U.S. securities firm by market value, experienced a credit rating cut to A+ from AA-. Merrill Lynch, the third-biggest firm, was cut to A from A+, as was the nation’s fourth-biggest securities firm, Lehman Brothers. The credit rating of Goldman Sachs, the largest U.S. securities firm by market value, was stated at AA-.
S&P says that the “outlooks on the large financial institutions sector in the U.S. are now predominantly negative.” To date, the firms have raised about $270 billion of new capital. This capital, however, is considered to be of lower quality because much of it is comprised of hybrid securities, exceeding the S&P limits on the amount of hybrids permitted in the capital structure.
A statement released by S&P analyst Tanya Azarchs said that S&P’s actions reflect “prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters.”
S&P also revised its outlook on Bank of America and J.P. Morgan Chase to negative. Citigroup was taken off review for a downgrade and given a negative outlook while Wachovia was placed on review for a downgrade. At Wachovia, shares fell to their lowest level since July 1995 after the bank ousted its CEO Ken Thompson.
S&P expects sharp deterioration in residential mortgage loan portfolios as well as residential construction. The loss rates for these loans are “poised to exceed historical levels by a wide margin” and may thereby lead to additional credit ratings cuts especially if bottom line losses or prolonged periods of low/volatile earnings continue.
