Moody’s Takes Big Banks Down a Notch or, in Most Cases, Two

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Karen, bring me my whiskey.Photo: Nathan Marx/iStock

Yesterday, as we all know, was the longest day of the year. At a bunch of Wall Street banks, though, today will seem much longer.

Fifteen big banks were downgraded by Moody's — or "repositioned," in Moody's-speak — after today's market close. Rumors about the downgrades took the Dow down 250 points today, its second worst drop of the year.

Morgan Stanley dodged a bullet; its rating was cut only two notches, even though Moody's had warned it might cut the bank by three notches. JPMorgan Chase, Citigroup, and Goldman Sachs were also downgraded two notches. Bank of America escaped with only a one-notch cut. Bank stocks were slightly up in after-hours trading, a sign that investors expected the cuts to be worse.

Investors are usually pretty "meh" about Moody's sovereign credit ratings. But bank credit ratings are different. Banks like to have good credit ratings so they can borrow money cheaply and keep clients happy. And when Moody's threatened to downgrade seventeen financial companies earlier this year, important executives at big banks jumped on the phone with the ratings agency, hoping to convince it to please, please not do that.

The reason banks care how Moody's rates them is because the ones with lower ratings are required to post more collateral for their trades and because some trading contracts have built-in ratings triggers that kick in below a certain level and force clients to move to better-rated banks. (It's also a pride thing. You think Goldman would ever want to be rated below those goons at BAML?)

In May, Morgan Stanley estimated that a three-notch downgrade would require it to post up to $9.6 billion in new collateral. James Gorman, the bank's CEO, said last month that a three-notch downgrade would be “a somewhat stunning outcome."

Gorman also channeled his inner Bruce Springsteen, saying he was “dancing in the dark" until Moody's took action.

Now that Moody's has given Morgan Stanley (relatively) good news, another Springsteen song may better capture his mood. Maybe "Better Days?" "We Are Alive?" "Tougher Than the Rest?"

All suggestions are welcome.