Moody's Investor Service cut the credit rating of the 6 largest US banks with international arms.
In anticipation of this, and on general economic jitters, stocks tanked 251 points June 21st in the second worst day of trading this year.
The downgrade of US banks reflects growing concern about the global economy and the exposore of US companies to the european debt crisis.
The Moody's Corp. unit reduced Morgan Stanley's rating to Baa1, which is three notches above the junk, or noninvestment grade, status that many bond buyers avoid. The move stands to add to the company's borrowing costs and force it to present billions of dollars in cash or high-grade bonds as collateral.
More important, the downgrade could trim Morgan Stanley's earnings power by cutting market share in high-margin businesses such as derivatives as traders seek out higher-rated trading partners. Questions about major banks' earnings power and capacity to withstand market shocks have weighed on financial stocks since early 2011.
Morgan Stanley's shares fell 24 cents, or 1.7%, to $13.96 in 4 p.m. New York Stock Exchange composite trading on Thursday during a broad market selloff. In after-hours trading, the stock was up 3.6%.
In a statement, the company said, "While Moody's revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years."
Over time, a downgrade could mean "the incremental new business could be tougher to win," said Glenn Schorr, an analyst at Nomura Securities. The company's shares have fallen 39% over the past year amid questions about its profit outlook.
But the two-notch rating cut saves Morgan Stanley from a blow to its reputation. The company that has labored since the financial crisis to dispel investor fears that it would be the first major financial firm to be rocked in any large market storm.
With many european leaders poised to initiate "growth" strategies by massively increasing government spending, investors are expressing their concern by driving up the cost of borrowing for nations like Spain and Italy. No one wants to be left holding the bag like Greek investors were, who were given 50 cents on the dollar for their government bonds.
The crisis has also affected American banks who have some exposure to bonds in Spain and Italy. A collapse of the Spanish banking sector would probably freeze credit markets worldwide, causing a meltdown similar to the one that occurred in the US in 2008. We won't know for a few days just how bad is the Spanish situation with its banks as an independent auditor releases results of stress tests performed over the last few months.
Investors want to be optimistic but there is so little good news for the economy that it is becoming harder and harder to see the silver lining. Manufacturing declined last month, as did sales of existing homes. This has affected employment outlook and the possibility of the US sliding back into recession cannot be dismissed.
It's going to be a long ,hot summer.
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