STOCK MARKET WATCH -- Friday, 22 June 2012

[Demeter]

19. Moody’s Cuts Credit Ratings of 15 Big Banks By PETER EAVIS and SUSANNE CRAIG NYT

http://dealbook.nytimes.com/2012/06/21/moodys-cuts-credit-ratings-of-15-big-banks/

...Citigroup and Bank of America, which have struggled to fully recover from the financial crisis, were among the hardest hit. After the downgrades, the banks stand barely above the minimum for an investment grade rating, a level also known as junk and a sign of the difficult business conditions they face.

Executives at the banks argued on Thursday that the new ratings failed to reflect the safeguards and changes that they had put in place in recent years. The cuts come at a time of tumult within the industry. Banks have struggled to improve their profits against the backdrop of the European sovereign debt crisis, a weak American economy and new regulations. The downgrades may amplify their problems. With lower ratings, creditors could charge the banks more on their loans. Big clients may also move their business to less-risky companies, further crimping earnings. As bank profits falter, consumers could also be affected. Companies often try to make up for lost revenue by passing costs on to customers. In the face of new regulations, banks have raised fees and other sources of income to bolster their business.

Moody's downgrades are part of a broad effort to make its analysis more rigorous. During the financial crisis, Moody's and its rivals got a black eye for placing high ratings on mortgage bonds that later imploded. Moody's approach reflects its belief that large banks have weaknesses that could still hurt their creditors. But some analysts feel that Moody's is playing a game of catch-up. The latest actions, say critics, are backward-looking and do not consider the measures that banks have taken to strengthen themselves, including raising capital and getting out of certain risky businesses like proprietary trading.

"I feel that Moody's action is five years too late," said Gerard Cassidy, an analyst with RBC Capital Markets....Now, bank executives will try to convince their creditors and large customers that Moody's has overreacted. MORE