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Moody’s Threatens to Downgrade Morgan Stanley’s Credit Rating; Morgan Stanley Immediately Searches for its “Subsidiary Shield”

Posted in Banks and Financial Services

Recently, news filtered out that Moody’s, one of the major credit ratings agencies, plans to downgrade Morgan Stanley as many as three levels, to Baa2.  That’s just two levels above what is known as “junk.”  Trash.  A purely speculative investment.

Well let’s just say the planned downgrade has caused a stir at Morgan Stanley.  As in, executives stirring their secretaries’ secretaries’ secretaries to call over to the execs at Moody’s—their golf buddies and godparents to their kids—to arrange meetings (wink, nod).  Morgan Stanley CEO James P. Gorman has repeatedly conferred with the brass at Moody’s in order to “limit the fallout” of a drop in ratings.

Much of the “fallout”—really a disaster—would be related to voided contracts and/or greater collateral requirements that are currently predicated on Moody’s’ credit rating.  A lower credit rating will allow customers to terminate or move to another offering bank, or force Morgan Stanley to post more collateral per trade.  Suffice it to say: None of these three options increases the bank’s profitability.

One way in which Morgan Stanley could “limit the fallout” is by sliding its trading operations to some of its subsidiaries that hold higher credit ratings.  Sound sleazy?  Well Citigroup and Bank of America already do it—they’re just a step ahead of the game.  They both face the same credit rating downgrade, but already have higher-rated subsidiaries that would insulate the initial blow.  This “subsidiary shield” demonstrates yet another backwards practice in the rigged credit ratings game that only big banks seem to be able to win.

So let’s say Mr. Gorman meets with Moody’s executives tomorrow (probably Gorman’s—oh—fifth time at their 7 World Trade Center headquarters in the new year), and they inform him that Morgan Stanley’s credit rating will be changed to “junk” on June 1, 2012.  He doesn’t miss a beat; he makes the call to his guys as he walks out of Moody’s’ headquarters: “Hey guys, Morgan Stanley has to become a shell for trades. We need everything transferred to our subsidiaries, stat.”  By the time June 1 rolls around, Morgan Stanley will have shielded itself from the downgrade, but largely unwitting customers will still have their contracts with the same “junk” company.

Heaven forbid Morgan Stanley take the impending credit downgrade as a sign that it should maintain greater collateral for each trade; that it should be more honest with customer-traders.  But that’s a naïve thought on my part; that’s not what these banks are about.  They’re about loopholes and capitalizing—er—capitalism.  Customers and transparency be damned.


Assisted by David T. Martin