“We have been especially surprised by Moody’s disproportionately adverse treatment of U.S. firms relative to banks in Europe.”
~Citigroup
This is the kind of story that most people just don’t care to pay attention to. But it’s a sign that markets are working. A few years ago – ratings agencies wrote publicly that they considered large banking institutions AAA credit due to “moral hazard”. In other words – these banks were simply too big to fail and thusly – the government would have no other choice but to step in and save them … and thus – they were AAA credit (nearly any risk).
For just the five U.S. Banks that are being downgraded – they are telling Wall Street that this is going to cost them $20 BILLION collectively. That’s not monopoly money.
But a few years later after having passed an imperfect financial reform law in the Dodd-Frank act … ratings agencies are sizing up these banks as no longer being too big to fail. This credit downgrade sets in motion several things that affect the average American in many ways … just not necessarily in a way that they’re aware of consciously.
- These banks will now have to pay higher interest to borrow money. That’s a cost to the bank that will eat into profits and put pressure on earnings and thus salaries to some extent if this maintains over the long term.
- The stock prices of these banks have been affected; anything that affects the stock price creates tension for the C-Suite executive team to fix. This puts pressure on the CEO and others to make the necessary changes to “fix” whatever is broken.
- The implicit elimination of “moral hazard” means banks won’t be able to take the same type of risks that they otherwise would have. There will still be plenty of risks … but where there used to be a big fat taxpayer safety net …. that is now gone. And that changes the risk/reward equation.
Reuters has the story HERE:
Ratings agency Moody’s downgraded 15 of the world’s biggest banks on Thursday, lowering credit ratings by one to three notches to reflect the risk they face from volatile capital markets activities.
Financial markets have been bracing for the credit rating actions since February, when Moody’s Investors Service said it had launched a review of 17 banks with global capital markets operations. These companies face diminished profitability and growth prospects due to difficult operating conditions, increased regulation and other factors, Moody’s said.
The long-term debt ratings cuts could increase funding costs for Morgan Stanley (MS.N) and other banks, and trading partners may ask for more collateral. But the impact could be muted since the changes were in-line with indications given by Moody’s on how much the rates were likely to be cut.
The Wall Street Journal breaks down the costs by bank HERE:
J.P. Morgan – $3.45 Billion
Bank of America – $2.7 Billion
Citigroup – $2.1 Billion
Goldman Sachs – $2.2 Billion
Morgan Stanley – $9.6 Billion
Forbes points out the chain effect HERE:
U.S. Treasury bonds look better than ever for investors looking for a safe haven from the summer heat. The Moody’s downgrades not only impact the banks directly, but other seemingly safe financial assets like money-market funds, for example, that invest in bank debts might look a little less attractive to the risk-averse investor because of the downgrades. The benchmark 10-year U.S. Treasury yield fell back down to around 1.6% on Thursday. It might be summer, but investors are jumping out of the risk-on swimming pool.
This means the U.S. government can borrow at a very, very cheap rate. In fact – when factoring inflation … we can essentially borrow at no interest right now in order to build roads, bridges, highways etc. Of course that won’t happen but it needs to be said since getting back to some basic “full employment” is the only real solution to the country’s deficit problems.
