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Defiance
By Benjamin Streed
June 25, 2012

Last Thursday, Moody’s Investor Services delivered on its promise to review the long-term credit ratings of many of the world’s largest global financial institutions and lowered the ratings of Bank of America, Barclays, BNP Paribas, Citigroup, Crédit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Royal Bank of Canada, Royal Bank of Scotland, Société Générale, and UBS. Recall that in February, the ratings agency placed these 15 global banks under review for potential downgrade after it listed such risks as “higher credit spreads” and “more fragile funding conditions” amongst a laundry-list of perceived challenges for these institutions. These institutions were singled-out as they all share business models that rely heavily on capital markets activities and Moody’s made clear that it views this line of business as “volatile” and that it carries with it a “risk of outsized losses”. Remember, back in March the Federal Reserve initiated another round of so-called “stress tests” for many of the largest U.S. banks and concluded that 15 of the 19 tested could maintain sufficient capital levels amidst another recession, continued stock repurchases, larger dividends and further housing market deterioration. Coincidentally, between the initiation of the review back in February and the conclusion last week, JPMorgan announced its now infamous “whale” derivatives trading losses out of its London offices. In an “I told you so” moment, Moody’s jumped at the opportunity to remind the world that this type of event, “Exemplified some of the issues, and exact issues, that we highlighted back in February when we began the review around opacity of risk and the potential for tail risk and the difficulty in risk managing some of these firms.”

Every one of the 15 banks received a lowering of their long-term credit rating with four firms having their debt cut one notch, ten were downgraded by two notches, and only a single firm had a three notch downgrade. The cuts to U.S. banks were the following: (Old Rating to New Rating): Bank of America (Baa1 to Baa2), Citigroup (A3 to Baa2) JPMorgan (Aa3 to A2), Goldman Sachs (A1 toA3), and Morgan Stanley (A2 toBaa1). Other affected global institution were: HSBC (Aa2 to Aa3), Royal Bank of Canada (Aa1 to Aa3), Credit Suisse (Aa2 to A1), BNP Paribas (Aa3 to A2), Crédit Agricole (Aa3 toA2), Deutsche Bank (Aa3 to A2), Société Générale (A1 to A2), UBS (Aa3 to A2), Barclays (A1 to A3) and Royal Bank of Scotland (A3 to Baa1) all received downgrades as well. Moody’s left all of the U.S. banks it downgraded on a negative outlook, indicating that their credit ratings may be cut again as it cited the uncertainty over continued government support. It noted that bondholder bailouts are becoming “less predictable” because of the “evolving attitude” of policymakers.