Interest Rate Roundup

Monday, June 02, 2008

S&P lowers the boom on banks, brokers

Standard & Poor's just took the ratings and outlook axes to several leading banks and brokers. From the firm's release (here is Bloomberg's take as well):

"At the conclusion of its review of global universal and investment banks, Standard & Poor's Ratings Services lowered its ratings on Lehman Brothers Inc., Merrill Lynch & Co. Inc., and Morgan Stanley. Standard & Poor's also revised its outlooks on Bank of America Corp. and JPMorgan Chase & Co. to negative. In addition, Standard & Poor's affirmed its ratings on Citigroup Inc., removed the ratings from CreditWatch negative, and assigned a negative outlook. We also placed the ratings on Wachovia Corp. on CreditWatch negative. The outlooks on the large financial institutions sector in the U.S. are now predominantly negative.

"The negative 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," explained Standard & Poor's credit analyst Tanya Azarchs. "They also reflect a reassessment of the vulnerabilities of the wholesale and less diversified model of funding for the specialized investment banks." (See "S&P Completes Review Of Global Securities Industry; Ratings Lowered On Morgan Stanley, Merrill Lynch & Co. Inc., And Lehman Brothers Holdings Inc.; Outlooks Negative," published June 2, 2008, on RatingsDirect, the real-time, Web-based source for Standard & Poor's credit ratings, research, and risk analysis.) For the universal banks, the outlook revisions reflect our expectation of further sharp deterioration in U.S. residential mortgage loan portfolios and residential construction. We believe loss rates in those loan sectors are poised to exceed historical levels by a wide margin. This could depress earnings to a greater extent than is discounted in our current ratings (see "Rated U.S. Banks Likely To Weather Market Difficulties," published May 6 2008, on RatingsDirect). If these firms were to suffer bottom-line losses or prolonged periods of low and volatile earnings, we could lower the ratings. Alternatively, if the effect is relatively less severe, the ratings could remain at current levels."


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