Moody's Downgrades Morgan Stanley, Cites 'Miscues'
On Monday, Moody's Investor's Service downgraded key credit ratings at Morgan Stanley (MS), citing the investment bank's "risk management miscues." The rating agency cut long-term ratings of the investment bank and its major subsidiaries to A1 from Aa3; the new rating is the agency's lowest pure-play credit rating in the top tier. Such ratings are so-called prime 1 ratings, with prime 2 ratings being the next tier in the investment-grade categories assigned by Moody's. Click here for a ratings scale. "The size of trading losses in the past year has reduced our confidence in Morgan Stanley's risk controls -- this is the primary driver of the downgrade," said Peter Nerby, a Moody's senior vice president. The Wall Street firm took on positions that proved difficult to unwind when markets became volatile and illiquid and produced a high levels of earnings volatility, he said. Morgan Stanley’s fixed-income revenue -- which include its mortgage business -- decreased an 85 percent on a year-over-year basis to $414 million, due in part to a loss of $436 million on mortgage-related trades during the second quarter. Over the past year, excluding recent gains from asset sales and credit spread widening on its own obligations, Morgan Stanley has reported a pretax loss of about $3.0 billion. The company could lose up to $7.0 billion before its current A1 rating would be threatened, Moody's said; the agency assigned its new rating a stable outlook, as a result. Despite the downgrade, Moody's said it expects that the diversity of these franchises will enable the firm to produce solid profitability for the balance of 2008 and 2009, even as certain capital markets stay challenging. For more information, visit http://www.moodys.com. That credit crisis we've been hearing pretty much non-stop about for over a year hasn't gone anywhere, if a regulatory filing Monday afternoon by JP Morgan Chase & Co (JPM) is any indication. In a filing with the Securities and Exchange Commission, the investment banking giant said that it took a $1.5 billion writedown on its mortgage-backed positions in July alone. The writedown came as JP Morgan said that it "continues to be negatively affected by the disruption in the credit and mortgage markets, as well as by overall lower levels of liquidity and wider credit spreads," and warned that both banking fees and client activity in its investment bank would suffer if the trend continued throughout the quarter. The company held $19.5 billion of prime and Alt-A mortgage-backed exposure and $1.9 billion of subprime exposure at the end of the second quarter. Outside of MBS/ABS/CDOs, JP Morgan also holds a $95.1 billion home equity loan portfolio, $14.8 billion subprime mortgage loan portfolio, and a $47.2 billion prime mortgage loan portfolio. July was a tough month for much of the secondary market, according to HW's sources; during the month, credit spreads reached levels last seen during the March meltdown that took down Bear Stearn & Cos. JP Morgan alluded to such in its filing, saying "trading conditions have substantially deteriorated versus the second quarter." JP Morgan pulled the plug on all non-agency loan products in its broker channel to start the third quarter, forcing any volume coming from its third-party origination channel to be salable to either Fannie Mae (FNM) and Freddie Mac (FRE), or FHA-based. The company will continue to underwrite jumbos via its retail mortgage channel, a spokesperson said. JP Morgan CEO Jamie Dimon told analysts that the company's prime book of mortgage business looked "terrible" in a conference call on July 17. Underscoring that outlook, the company said Monday that prime and subprime mortgage net charge-offs are expected to continue to rise significantly during the second half of 2008, with deterioration expected to continue into 2009, as well. For more information, visit http://www.moodys.com. em>Disclosure: The author held no positions in MS when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.