Bank Of America, Citigroup, Morgan Stanley Could Be Downgraded When S&P Issues Ratings Within Weeks

Standard & Poor's plans to update its credit ratings for the world's 30 biggest banks within three weeks and may well mete out a few downgrades in the process, possibly surprising battered global bond markets.

Among the institutions that could be downgraded are Bank of America Corp , Citigroup Inc and Morgan Stanley , said Baylor Lancaster, an analyst at CreditSights Inc.

Spokesmen for the three banks declined to comment.

Some European banks could also be affected. On November 9, S&P downgraded its scores for the health of the banking industries in a number of countries, including Denmark, Sweden, Finland and the Netherlands.

The updates in ratings are part of a major overhaul of S&P's methods for scoring the creditworthiness of some 750 banking groups.

The agency, the subject of intense criticism because its positive ratings for mortgage-backed securities played a major role in inflating the U.S. housing bubble, has been working on the changes for more than a year.

The updates are part of a broad push by S&P to improve its products and repair its reputation as its parent, McGraw-Hill Cos Inc , divides itself into two publicly traded companies.

S&P has taken pains to prepare the markets for the changes, but when it actually releases results for individual banks some downgrades could surprise, analysts say.

"One reason there could be surprises is that the new ratings method is very complex and it has been very difficult to simulate results," said Beate Muenstermann, a London-based research analyst for the money management arm of JPMorgan Chase & Co.

One area for potential surprise lies in differences between actions the agency may take on bank holding companies compared with grades for their operating units. Another is variations between long-term and short-term ratings.

S&P posted an advance notice of the coming changes in March 2010 and in January 2011 outlined its initial plans and requested comments.

Earlier this month the agency published its final criteria and said it expects 60 percent of all bank ratings to stay as they are, while 20 percent will go up one notch, 15 percent will fall by one notch and less than 5 percent will drop by two or more notches. One notch is one-third of a letter grade -- for example, the difference between a rating of "A" and a rating of "A-minus."

S&P has not said what proportion of downgrades it expects among only the biggest banks. It has said to expect regional differences in the results for all banks. Western Europe fared worse than Latin America and Asia in the November 9 changes in scores for banking industries by country.

S&P estimated in January that there would be more downgrades, but the agency lowered some ratings while the plan was being completed and also eased some of the criteria.

The agency plans to first announce its results for the 30 biggest banks, possibly as early as late this month, and then begin quickly rolling out its ratings for smaller banks.

The agency has been discussing the often-arcane mechanics of the new methodology with banks and institutional investors and has posted explanations and tutorials on public pages of its website:

"S&P has been extremely good at guiding the market through this change in the methodology," said Muenstermann.

How the changes are perceived by regulators could prove to more important to S&P than to the markets. Bond fund managers say the market has probably already priced in the information underlying S&P's research and judgments.

"The rating agencies tend to be laggards compared with prices," said Ryan Brist, a portfolio manager at Western Asset Management.

S&P's changes may even foretell a coming upturn for banks, he said. "Historically, ratings agencies tend to change their methodologies after large downward price movements in the market."

John Croft, a portfolio manager and director of investment grade research at Eaton Vance, said, "They seem to be fiddling around with their methodologies more than opining about the underlying credit strength of issuers."

Still, Croft gives the agency credit for trying to do better than in the past. Past ratings proved too high on such financial companies as Lehman Brothers, ABN AMRO and Wachovia, which either failed outright or were forced into mergers with stronger rivals.

"They are trying to rectify some of the problems that they have had in the past and to the extent that they do that, it is good," said Croft.

S&P expects to be able to use the system to more quickly change its ratings, such as when it sees new threats to bank funding or changes in how much government bailout support creditors can expect, said Jayan Dhru, a managing director at S&P, on Friday.

Dhru said S&P's ratings will also make better comparisons of banks around the world by applying consistent measurements of bank capital, something that is weak in the ratios banks report under international Basel standards designed by regulators. The Basel rules allow individual countries latitude in how their banks count capital.

The agency's performance is under scrutiny from regulators, who are designing ways to reduce the power and profits from the ratings business now enjoyed by S&P and its main competitor, Moody's Corp .

S&P made matters worse last week when its computer systems accidentally sent a note to some customers suggesting that the credit rating of the Republic of France had been downgraded in the midst of the European debt crisis.

S&P said later the error stemmed from a computer programing step it had taken last December with the banking industry country scores used in the first step of its new ratings method.

(Reporting by David Henry in New York; Editing by Steve Orlofsky)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[Elwise1]

12:38 PM on 11/19/2011

I wonder whether the amount of credit default swaps each bank has issued has factored into these ratings? US banks may have won because mostly European banks held the bonds and mostly US banks issued the "insurance." ( correct me if I'm wrong.) But all the effort to avoid a technical "credit default" with the Greek bonds voided the ability to collect on the "credit default" insurance" at the same time. Ah, that fine print gocha!

You don't insure for voluntary cooperation with a reduction in value. That leaves the European banks than hold the Greek debt in a lot more hurt than they planned, and probably more than a little mad at the US Banks.

We may be seeing less financial cooperation between the two sides of the Atlantic in the days to come, and no one volunteering to take a haircut anymore. In fact if any bank can weasel out of accepting a "haircut" on Greek bonds because parts of the deal aren't yet sealed, I would bet they will.

It may well be the established catch-22 that sinks the Euro. Their best solution isn't a solution because it caused far greater harm, than giving Greece more time helped. All credit default swaps are now suspect and a rethink. And fewer will be bought. And fewer claimed to reduce risk in a stress test.

S&P ratings are now suspect unless they can say they factored this in.

[nothingchanges]

10:35 AM on 11/19/2011

Who cares about an S&P downgrade of Big Banks?

The more important "downgrade" needs to come from the American People.

Move your money, vote with your feet.....................hit them where they hit us, where it hurts the most.......................

Their bottom line.

[whitcombc]

10:03 AM on 11/19/2011

This will actually help boost profits again. That's how the system works. You know - the system that nearly destroyed the world's economy - Banks, Wall St, and the Rating agencies. So they lower the bank ratings giving fund managers a reason to sell billions of shares and tell their customers (401K holders) that they HAD TO - then the Banks and the Big Brokers purchase the stocks at much lowered prices. (this is how the richest get richer) and then sell them all when the stock drifts up again. Just with Bank Of America there were days when people bought or sold nearly a BILLION Shares! someone had to buy and someone had to sell. The ONLY people sure to gain money are those doing the transactions UNLESS there is a concerted effort to screw with the stock price. Selling a billion shares will probably make the stock go down. (it did) and over the next 5 days a billion shares were bought back at a $2 lower price. So someone made a couple pf Billion. When the downgrade comes the stock gets dumped, goes down and then back up in a week by about the same amount. It is a scam because you and I cannot do this with even 100 share blocks. It takes too long to "clear". Only the biggest can do this.

[JPJABBER]

09:51 AM on 11/19/2011

Huff Po won't let me post the link to the MSNBC article about Big Lobbying Firm seeking to undermine OWS protests.

[SPITR]

07:37 AM on 11/19/2011

So S & P is actually going to do their job! 'Bout time.

[PotomacOracle]

04:06 AM on 11/19/2011

Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks’ own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.

The banks are going to rely on trading in their own accounts and sit on the cash (T-bills being paid to do nothing constructive with cash) and, not loan it out. So can everyone please stop saying that the bailouts were necessary to increase liquidity?

Now that the economy continues to tank, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don’t really need credit in the first place.

So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders. That's why Community Banks and Credit Unions have surged over the period 2008-2011. In reality, according to Stiglitz and others, the insolvency of the TBTF banks is desirable since their failure would generate an environment of broad based competiton among smaller depository institutions which would, in turn, open credit doors to society at-large.

[knott wrench]

12:04 AM on 11/19/2011

When you first create the problem, get a "Bailout" ($2 Trillion Dollars) and then Don't Loan out the Money you got to help you and loan out to home purchasers and small business owners, which negatively impacts the Country's Economy, and on downward, what Do You Expect?

You created the problem, continued to self -perpetuate it, and now you'll suffer the Consequences for your wrong doing!

Almost forgot, "Sucking Up to Chuckie and Davie Koch!

[lvdragonlady]

09:27 PM on 11/18/2011

DOWNGRADE all of them, they have worked so hard and EARNED IT.

[kamact]

08:15 PM on 11/18/2011

Down grade and down size these TBTF banksters,...These are state-sponsored financial terrorists groups,...Patoitic Americans need to remove thir threat from this country,...

[LynnW49]

07:38 PM on 11/18/2011

I would say, "let the bribing begin," but I am sure it has been going on for a while.

[oftenon]

07:24 PM on 11/18/2011

Paragon of Perfidy Belches New Benchmarks - coming up: Madoff's top stock picks

[Hiphopcrates]

07:09 PM on 11/18/2011

We are approaching the event horizon.

[ErnestineBass]

08:00 PM on 11/18/2011

Yep. The only question that remains is which TBTF will fall first.

My money's on BofA (pardon the pun).

[Carolab]

01:06 AM on 11/19/2011

Since BofA is the dumping ground for all of the toxic waste, it's a safe bet.

[bikerdude]

06:10 PM on 11/19/2011

S & P are bought and paid for...

[IndyFem]

06:10 PM on 11/18/2011

They are all rated FFF in my opinion...besides...who cares what any of these bogus rating agencies say.

[Roy Blizzard III]

06:08 PM on 11/18/2011

Join with us as we mobilize and educate the County Sheriffs and homeowners to stop this fraud being perpetrated on America by the banks and servicers. Go to Homeowners Against Mortgage Servicing Fraud on Facebook. This all begins when the banks take a negotiable instrument - your loan note- and convert it without your permission to stock so they can trade it on wall street. They destroy your original negotiable instrument because they can't have both stock and a negotiable instrument. This is against the LAW. This is why there are millions of homes without any loan note. If they surfaced, it would be proof of the scam and crime, so they just create New ones by forging documents when push comes to shove and most homeowners aren't educated enough to know all this. Roy Blizzard III

[Siebenstein]

05:24 PM on 11/18/2011

Can anyone tell where S&P stops and these banks begin?