Reply #24: Morgan Stanley Put on Watch for Possible Downgrade by Moody's (Update: Goldman on Negative Outlook)

[ozymandius]

Story from the NY Times:

Much of the concern centered on Morgan Stanley’s deal to raise $9 billion from Mitsubishi UFJ of Japan. Despite repeated assurances from Mr. Mack and Mitsubishi executives, some investors worry that the decline in Morgan Stanley’s share price, coupled with the steep sell-off in the Japanese stock market this week, might prompt Mitsubishi to reconsider its investment. Morgan Stanley hopes closing the Mitsubishi deal will help ease the burden on its shares the way Warren E. Buffett’s $5 billion infusion helped stabilize Goldman Sachs.

Fears that the deal would not close were evident in the bond market, where Morgan Stanley’s 10-year debt sank to 64 cents on the dollar on Thursday, down from 96 cents a month ago. The price of insuring Morgan Stanley’s debt soared to record heights....

And now here's the excellent rant from Yves Smith:

Now I am really going to rant. What is going on here? The financial system is on the verge of a meltdown, we have the Lehman credit default swaps settlement tomorrow, which is a huge test that has investors on Defcon One. Markets are as unhinged as they can be and still be functioning around the margin. So Moody's decides NOW to put out a possible downgrade alert for Morgan Stanley?

After their DECADES of being slow to downgrade, of almost religiously administering downward revisions after the bond markets had already re-rated the credit on their own, Moody's decides to become true believers in timeliness when that can have the effect of driving a knife into the markets and giving a twist?

If an investment bank is downgraded beyond a certain level, counterparties stop trading with it because they will get downgraded automatically by virtue of their exposure, Thus concerns over a possible downgrade can lead dealers to start directing business away from a firm that appears to be weakening, creating the beginnings of a run. Morgan Stanley is bigger than Lehman was. After the havoc the collapse of Lehman wrought, Morgan Stanley will not be permitted to fail. But to have that hanging over the markets at this juncture is the worst timing imaginable.

There's so much more there. Is Moody's trying to claw its way back to being relevant?