This week’s attempt by Moody’s Ratings Service to throw a scare into markets appears to have had all the impact of a wet firecracker.
The impending downgrade was aimed at 17 financial institutions all over the world, including Canada’s Royal Bank (T.RY), besides the sexier American ones like Bank of America (NYSE: BAC), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS), and venerable lenders the world over.
Moody's was said to be poised to take Morgan Stanley's credit down by three notches; Citi, Goldman, and Chase could fall two places; and Bank of America could drop one.
But the consensus Friday was that banks, by and large, had taken the threat in stride. Though Bank of America had tailed off 1% by noon ET Friday, Citigroup was in the green, while rivals Goldman and Chase were screaming nearly 1% higher in stock price.
Royal, for its part, was off 0.4% by 1 p.m. ET to $53.14, in about the middle of a 52-week range, apparently more, though, in response to general market malaise on Friday in Canada than the downgrade threat.
Royal it is said, could be subject to a downgrade of as much as two notches, which would come a little over a year after the bank was last cut by Moody's.
"We are surprised to be included; our inclusion is unwarranted," RBC declared on Thursday. "This action does nothing to help investors differentiate between strong banks and weak ones. RBC's credit rating and capital base are among the strongest of all banks globally."
Said CBS Moneywatch, "in general, 'pure-play' securities firms like Morgan and Goldman face greater profit challenges than commercial banks like B of A and Chase because the former are heavily dependent on underwriting, advising companies on mergers and acquisitions, and other traditional investment banking businesses that are slowing down."
Of course, the CBS piece continues, just because the downgrade is somewhat expected does not mean the impact is not going to be felt. The article quotes University of San Diego law and finance professor Frank Partnoy, a ratings agency expert, thus "credit ratings do not help parties manage risk, yet parties increasingly rely on ratings. Credit rating agencies are not widely respected among sophisticated market participants, yet their franchise is increasingly valuable."
As a result, folks shouldn’t relax too much. "Standard & Poor’s can still roil the markets," the CBS article concludes, "by snipping America's debt rating, as the ratings firm did last year, even as investors waggle their tongues at such pronouncements by flooding into U.S. Treasuries."
