By Pam Martens: June 11, 2012
As Congress and a growing number of economic analysts rethink the mega bank model and the repeal of the depression era Glass-Steagall Act that walled off commercial banks holding insured deposits from high risk investment banks and brokerage firms, Moody’s is expected to raise more alarm bells within the next two weeks.
It is anticipated based on previous statements from Moody’s that up to 17 global banks may see a ratings downgrade. Among the group, five of the largest U.S. banks could be negatively impacted, including, JPMorgan Chase, Bank of America Corp., Citigroup, Goldman Sachs Group and Morgan Stanley.
Morgan Stanley may see a multi-level downgrade; its corporate bonds are trading as if the downgrade has already occurred. This is not reassuring to the millions of brokerage clients in the firm’s Morgan Stanley Smith Barney unit.
In 2009, Morgan Stanley purchased 51 percent of the Smith Barney brokerage unit. At the time, confidence was draining from Smith Barney’s struggling parent, Citigroup. The combined brokerage firm is the largest on the street with over 17,000 brokers as of last year, according to Smart Money magazine.
On June 1, both the 10-year Treasury Note and the 10-year German Bund set historic new lows: 1.45 percent and 1.13 percent, respectively. Both countries are seeing stress in their banking structures and a flight to the perceived safety of government securities. Germany has the added problem of financial turmoil in the Euro Zone.
Moody’s had this to say about German banks on June 6 when it downgraded six German banks by one notch:
“While most German banks have significantly improved their regulatory capital ratios, as well as the quality of their capital, this is more than offset in Moody’s opinion by the elevated, and rising, risk of external shocks and losses that may arise from the evolving European debt crisis. With only 4.0% of their assets backed by equity at year-end 2011 (source: company information), the simple balance-sheet leverage displayed by rated German banks remains lower than that of many European peers. While simple leverage does not capture the risk content of assets, it complements regulatory ratios based on risk-weighted assets (RWAs). The latter can be misleading, given differences in regulatory rules and also given that some assets with very low risk weights have caused massive losses in recent years, including for German banks.”
If one thinks the banking crisis that began in 2008 is over, there is a powerful argument that can be made that the band aide reforms that were enacted to address the earlier problems are now ushering in Phase II of the crisis. This phase has the potential to be a more virulent form of creative destruction than we have previously witnessed.
