Summary of S&P ratings actions on financials -- LEH, MS and MER downgraded, BAC and JPM outlooks lowered
As mentioned in numerous comments over the past 20 minutes, Standard and Poors took several credit ratings actions within the financial sector... At the conclusion of its review of global universal and investment banks, Standard & Poor's Ratings Services lowered its ratings on Lehman Brothers (LEH), Merrill Lynch (MER), and Morgan Stanley (MS). Standard & Poor's also revised its outlooks on Bank of America (BAC) and JPMorgan Chase (JPM) to negative. In addition, Standard & Poor's affirmed its ratings on Citigroup (C), removed the ratings from CreditWatch negative, and assigned a negative outlook. They also placed the ratings on Wachovia (WB) on CreditWatch negative. The outlooks on the large financial institutions sector in the U.S. are now predominantly negative. "The negative 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... They also reflect a reassessment of the vulnerabilities of the wholesale and less diversified model of funding for the specialized investment banks." For the universal banks, the outlook revisions reflect our expectation of further sharp deterioration in U.S. residential mortgage loan portfolios and residential construction. They believe loss rates in those loan sectors are poised to exceed historical levels by a wide margin. This could depress earnings to a greater extent than is discounted in our current ratings. If these firms were to suffer bottom-line losses or prolonged periods of low and volatile earnings, we could lower the ratings. Alternatively, if the effect is relatively less severe, the ratings could remain at current levels. The extraordinary capital raises by the industry have been most welcome and have mitigated the severity of downgrades. However, the quality of capital has suffered in that much of the capital was in the form of hybrid securities. In many cases, the resulting amount of hybrids in the capital structure now exceeds Standard & Poor's limits on such instruments. Standard & Poor's will hold a telephone conference call on Tuesday, June 3, at 10:30 a.m. EDT to discuss these actions and related issues.
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