Morgan Stanley bonds and credit derivatives under pressure
Even before Moody's announced in February that it would review Morgan Stanley and other banks for possible credit downgrade, it had suffered mightily in the credit markets.
Its bonds and credit derivatives have been trading at junk levels since last summer, and they recently came under more pressure thanks to host of threats. Here's how Reuters describes its woes: "Investors have been worried about the bank's exposure to Europe for months, despite the bank's disclosures indicating that its potential losses are limited. Its Morgan Stanley Smith Barney retail brokerage joint venture is not generating the returns that investors had expected. Unexpected losses at its joint venture with Mitsubishi UFJ Financial Group last year also caused concern about management's ability to deliver more consistent trading profits. Morgan Stanley's problems were compounded by its handling of the Facebook IPO - its high price and large size, and selective disclosure of an analyst's reduction of his forecasts for the social network's revenue and earnings."
Most assume that a rating reduction is "fait accompli" for the banks, and that it's really a matter of how many notches. Analysts rate the probability of a two-grade cut at anywhere between 40 and 75 percent. At least one analyst pegs the chances of a three-level cut at 60 percent. In any case, the bank has made it known that it has built its liquidity to the point that it can take the hit.