Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (9531)	6/3/2008 1:02:24 AM
From: John Pitera	Read Replies (2) \| Respond to of 33421

Morgan Stanley, Merrill, Lehman Ratings Cut by S&P (Update3) By Christine Harper June 2 (Bloomberg) -- Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. declined in New York trading after Standard & Poor's lowered credit ratings for the investment banks, saying they may have to book more writedowns on devalued assets. Morgan Stanley, the second-biggest U.S. securities firm by market value, was cut one level to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest, was also cut one level to A from A+, as was Lehman Brothers, the fourth-biggest. Goldman Sachs Group Inc., the largest of the group, was affirmed at AA-. The outlook on all four New York-based companies remains negative, S&P said. The downgrades may make it harder for the banks to sell derivatives such as credit-default swaps that are tied to bonds or loans, said Brad Hintz, an analyst at Sanford C. Bernstein in New York. Single-A rated firms are less desirable as trading counterparties for fixed-income derivatives that extend longer than five years, he said. ``You'll see derivatives profitability drop off over a period of time,'' Hintz said of the three downgraded investment banks. ``We estimate somewhere around 1 percent to 1.5 percent of fixed- income revenues are at risk.'' The firms are also likely to have to post more collateral on the trades they've already made with other parties, raising their costs, Hintz said. Collateral In its last quarterly filing, Merrill said a one-notch downgrade of its credit rating would require it to post an additional $3.2 billion of collateral on over-the-counter derivative trades. Morgan Stanley estimated in a regulatory filing that a single level downgrade would mean posting an extra $973 million. Lehman said a one level downgrade requires about $200 million of additional collateral. Morgan Stanley spokeswoman Mary Claire Delaney declined to comment, as did Merrill spokeswoman Jessica Oppenheim and Lehman spokesman Mark Lane. Morgan Stanley, Merrill and Lehman sank in New York Stock Exchange composite trading. The cost of insuring against a default on each of the companies' debt jumped initially and then retreated later in the day. Lehman fell $2.98, or 8.1 percent, to $33.83 in NYSE composite trading, while Merrill lost $1.30, or 3 percent, to $42.62. Morgan Stanley dropped $1.13, or 2.6 percent, to $43.10. Goldman declined $4.07, or 2.3 percent, at $172.34. Writedowns The S&P rating ``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,'' Tanya Azarchs, an S&P analyst, said today. S&P suggested the banks may have to sell more stock to help offset the charges, according to Hintz. The report said financial institutions have raised too much capital in the form of so-called hybrid securities, exceeding S&P's limits on such instruments. ``The risk of further equity dilution probably has gone up,'' Hintz said. The biggest banks and securities firms have booked about $387 billion of writedowns and credit losses since the beginning of last year, as the collapse of the subprime mortgage market prompted a contraction in credit markets worldwide. So far, the firms have raised about $270 billion of capital. `Negative Outlooks' S&P revised its outlook on Bank of America Corp. and JPMorgan Chase & Co. to negative. Citigroup Inc. was taken off review for a downgrade and given a negative outlook, while Wachovia Corp. was placed on review for a downgrade. Wachovia shares fell to the lowest level since July 1995 after the bank ousted Chief Executive Officer Kennedy Thompson today, signaling the company may report a second-quarter loss. ``The outlooks on the large financial institutions sector in the U.S. are now predominantly negative,'' S&P said in today's statement. To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.