Morgan Stanley & Goldman Sachs Are Junk

Morgan Stanley dropped for a fifth day after Moody's Investors Service said it may reduce the U.S. investment bank's credit rating on concern the financial crisis threatens earnings and investor confidence.

Morgan Stanley fell 5 percent to $11.80 in German trading after slumping 26 percent yesterday in New York to its lowest level since 1996. Moody's put Morgan Stanley's A1 long-term rating on review for a possible downgrade and lowered its outlook for Goldman Sachs Group Inc.'s Aa3 long-term rating to negative.

"An extended downturn in global capital market activity will reduce Morgan Stanley's revenue and profit potential in 2009, and perhaps beyond this period,'' Moody's said in an e-mailed statement.

The possible downgrade adds to pressure on Chief Executive Officer John Mack as he seeks to assure shareholders and clients about the company's long-term health. The bankruptcy of Lehman Brothers Holdings Inc. and emergency sales of Merrill Lynch & Co. and Bear Stearns Cos. sparked concern that companies like Morgan Stanley that depend on debt markets will run out of funding.

"Investor, counterparty and customer confidence is critical to the funding and profit generation of the firm, especially in a hostile market environment,'' Moody's said in its statement on Morgan Stanley.

Morgan Stanley and Goldman Sachs declined yesterday in New York Stock Exchange composite trading as a short-selling ban expired and concern grew about their earnings prospects. The New York-based firms have transformed themselves into bank holding companies and raised money from outside investors to help weather the credit market turmoil that toppled Lehman Brothers.

Mitsubishi UFJ

The Morgan Stanley review affects about $200 billion of debt, Moody's said. The ratings company affirmed its Prime-1 grade for Morgan Stanley's short-term debt. The outlook for Goldman affects $175 billion of debt, and the company's short-term ratings were also affirmed at Prime-1.

Moody's in August cut Morgan Stanley's long-term credit rating from Aa3. At A1, the firm now has the fifth-highest investment grade rating.

Morgan Stanley is selling more than 20 percent of itself to Japan's Mitsubishi UFJ Financial Group Inc. for $9 billion. Morgan Stanley and Mitsubishi UFJ have moved to quash speculation that the deal would collapse, as the U.S. firm's shares tumbled 48 percent this week. The deal will close Oct. 14 "as planned,'' Mitsubishi UFJ spokesman Takashi Takeuchi said today in an interview.

Closing the investment will be "critical'' for Morgan Stanley to keep its current credit ratings, Moody's said.

Fed and Buffett

"Morgan Stanley's recent performance has been relatively solid, it has acted to solidify its capital base, it has maintained a good liquidity profile, and it has benefited from a level of systemic support that is factored into the rating,'' Moody's said in its release.

Egan-Jones Ratings Co. estimates that Morgan Stanley "probably needs $30 billion of new equity to address concerns'' about its financial strength. The company has about $900 billion of assets and an equity market value of $15.9 billion.

For Morgan Stanley and Goldman, becoming bank holding companies regulated by the Federal Reserve may "limit profit opportunities,'' while at the same time lower risks, Moody's said.

Goldman has raised $10 billion, including $5 billion from billionaire investor Warren Buffett. The company, led by Chief Executive Officer Lloyd Blankfein, has recorded $4.9 billion of credit market losses since August last year, compared with $15.7 billion at Morgan Stanley.

"Goldman's commitment to controls is noteworthy,'' said Moody's analyst Peter Nerby in the statement.

Morgan Stanley said yesterday that its hardest-to-value assets rose 13 percent in the quarter ended Aug. 31. The firm classified $78.4 billion of its assets, or about 8 percent of the total, as so-called Level 3 in the third quarter, up from $69.2 billion, or 7 percent, in the previous period.

Source - Bloomberg