Is Moodys Ready to Strike With Downgrades?

The big banks are sweating the next several days as rumors swirl about Moodys downgrading several global banking conglomerates.

The banks, at least a dozen by some insiders’ estimates, include J.P. Morgan Chase, Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., and Morgan Stanley, are all carefully preparing for the potential downgrade by Moody’s Investment Service. Word is that it could come by the end of this week, according to Wall Street Journal reports. It’s also believed at least five American banks will take a hit.

Should we expect complaints about tough banking regulations? And if we do, is there anyone willing to step up to the plate and remind the banks that the regulations were due to a “wild west” mentality that many senior banking officials enjoyed for years, with entitlements, while also playing fast and loose with mortgages, bank and credit card fees?

Inadequate Methods

These downgrades have circulated for several months and have caused more than a few sleepless nights for some banking officials. John Gerspach, Citibank’s CFO, said in an interview with the Wall Street Journal that the method Moodys uses is sorely lacking and is woefully inadequate. Further, he says the ratings methods “do not provide adequate credit to the strength and diversity” of Citibank. It would appear he has concerns that his bank might be one that’s downgraded.

He goes on to say that every time Moody’s makes a move, it limits his bank’s options in terms of what it can buy. Goldman Sachs Asset Manager David Fishman agreed. Even worse, the timing couldn’t be worse as every economic indicator – both global and here at home – is anything but hopeful for the immediate future. With concerns that Greece is preparing to exit the Eurozone, fears that Spain is ready to bail, the economic slowdown in China and the economy that’s simply not improving in the U.S., it’s difficult to drum up hope for the financial future of many nations.

Local Levels

The effects would most certainly trickle down to local and state governments too. If banks are downgraded and if they further tighten their lending rules, the way in which banks make loans to consumers and small businesses within their communities is going to be limited as banks will approach loan applications with a healthy dose of caution.

Meanwhile, the big banks are already going on the defense. Blaming Dodd-Frank, some are saying the newer regulations aren’t feasible; however, others are pointing out the Dodd Frank regulations were authored because too many financial entities were overstepping their boundaries when the recession and mortgage crisis took center stage in 2008.

For now, the potential exists for less demand for derivatives by at least thirty percent. The biggest question isn’t if, but when – and then how many notches will each bank be brought down?

About Moody’s

Moody’s is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets. Moody’s Corporation (NYSE: MCO) is the parent company of Moody’s Investors Service, which provides credit ratings and research covering debt instruments and securities, and Moody’s Analytics, which offers leading-edge software, advisory services and research for credit and economic analysis and financial risk management. The Corporation, which reported revenue of $2.3 billion in 2011, employs approximately 6,400 people worldwide and maintains a presence in 28 countries. Further information is available at www.moodys.com.

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