Just as thermometers rose to record levels on Thursday, the credit scores of fifteen world financial powerhouses took discouraging plunges. Ratings agency Moody’s downgraded major banks like JPMorgan, Citigroup, Goldman Sachs by up to three notches. The updated ratings signify spreading fears that Wall Street’s debts are posing wider risks.
This came as no surprise to the financial sector. Moody’s said in February that it might downgrade the credit ratings of major banks. But with the euro’s declining value and the Dow Jones Industrial Average experiencing its second-biggest drop of the year, losing over 250 points on Thursday, investors are slowly losing confidence in even the safest financial assets. The downgrades could raise borrowing costs and tempt trading partners to increase their collateral.
Johannes Wassenberg is a managing director at Moody’s who primarily covers European banks. He told Bloomberg News in a Friday morning phone interview that updating the ratings was an inevitable task.
“We have had negative outlooks for these banks for some time and clearly as risk increased we had to reassess our ratings,” Wassenberg said.
JPMorgan is the largest American bank, with services ranging from corporate lending, credit cards, and asset management. Their recently announced $2 billion trading loss was an important factor in the downgrade, Wassenberg added.
JP Morgan CEO Jamie Dimon testified before the Senate Banking Committee last Wednesday and faced the House Financial Services Committee on Tuesday. At the latter hearing, he doubted that the loss was directly responsible for the credit plunge.
“It may have aggravated what happened,” said Dimon. “I wouldn’t say it was the cause of what happened.”
Moody’s decision to release updated ratings bookends a trying week for America’s banks. The Financial Industry Regulatory Authority fined Bank of America’s Merrill Lynch wealth-management unit $2.8 million earlier this week. The private regulatory organization noted that the New York-based brokerage overbilled customers by $32.2 million over an eight-year period because they lacked adequate supervisory systems.
“Investors must be able to trust that the fees charged by their securities firm are, in fact, correct,” FINRA enforcement chief Brad Bennett told the Associated Press on Wednesday. “When this is not the case, investor confidence is threatened.”
Public relations representatives from other banks quickly dismissed the updated ratings, calling them inaccurate portraits of their business models.
Royal Bank of Scotland:
The Group disagrees with Moody’s ratings change, which the Group feels is backward-looking and does not give adequate credit for the substantial improvements the Group has made to its balance sheet, funding and risk profile… The Group continues to maintain a solid liquidity and funding position. RBS has completed its planned wholesale funding requirements for 2012.
RBS spokeswoman Katherine Gay:
We remain one of the strongest and one of the highest rates banks in the world across a number of categories. We don’t expect any impact on our clients and minimal impact on our business.
We believe the ratings still do not fully reflect the key strategic actions we have taken in recent years… With our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders.
Goldman Sachs spokesman David Wells:
We believe our strong credit profile and unique mix of attractive, high-return businesses with an institutional client focus will continue to serve our shareholders, creditors and clients well.
Citi strongly disagrees with Moody’s analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted. Moody’s approach is backward-looking and fails to recognize Citi’s transformation over the past several years, the strength and diversity of Citi’s franchise, and the substantial improvements in Citi’s risk management, capital levels and liquidity.