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S&P Cuts Credit Rating Of 3 Securities Firms

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Bloomberg News

The Tampa Tribune

Published: June 3, 2008

Morgan Stanley, Merrill Lynch & Co. and Lehman Bros. Holdings Inc. plummeted in New York trading after Standard & Poor's lowered credit ratings for the investment banks, saying they may have to book more write-downs on devalued assets.

Morgan Stanley, the second-biggest U.S. securities firm by market value, was cut to A+ from AA-, S&P said today in a report.

Merrill Lynch, the third-biggest, was cut to A from A+, as was Lehman Bros., the fourth-biggest.
Goldman Sachs Group Inc., the largest of the group, was affirmed at AA-. The outlook on all four New York-based companies remains negative, S&P said.

The "actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters," Tanya Azarchs, an S&P analyst, said Monday in a statement.

The ratings downgrades may make it harder for the banks to sell derivatives such as credit-default swaps that are tied to bonds or loans, said Brad Hintz, an analyst at Sanford C. Bernstein in New York. Single-A rated firms are less desirable as trading counterparties for fixed-income derivatives that extend longer than five years, he said.

"You'll see derivatives profitability drop off over a period of time," Hintz said of the three downgraded investment banks. "We estimate somewhere around 1 percent to 1.5 percent of fixed- income revenues are at risk."

The firms are also likely to have to post more collateral on the trades they've already made with other parties, raising their costs, Hintz said.

Morgan Stanley spokeswoman Mary Claire Delaney declined to comment, as did Merrill spokeswoman Jessica Oppenheim and Lehman spokesman Mark Lane.

Morgan Stanley, Merrill and Lehman sank in New York Stock Exchange composite trading, with Lehman dropping as much as 8.8 percent. The cost of insuring against a default on each of the companies' debt jumped.

Lehman was down $2.43, or 6.6 percent, to $34.38 at 2:17 p.m. in NYSE composite trading, after falling as low as $33.58 earlier today. Merrill was down $1.33, or 3 percent, to $42.58, and Morgan Stanley lost $1.46, or 3.3 percent, to $42.77. Goldman was down $3.70, or 2 percent, at $172.71.

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