Banking, finance, and taxes

The Moody's Giant Bank Downgrade Finally Arrives

24/7 Wall St. has been expecting this highly anticipated Moody’s downgrade of the large banks and investment banks for weeks.  It appears that the wait is over as the downgrade is set to come after the close of trading today.  The headlines will look awful in many cases, but do not forget that this has been an expected event for months now.  Weak economic data was weighing on the markets already and this added pressure.

Moody’s has telegraphed a banking sector review for quite some time and we expect the downgrade to be on five money center banks and one Canadian bank. Moody’s warned back in February in a very staged method that Credit Suisse Group (NYSE: CS), Morgan Stanley (NYSE: MS), and UBS AG (NYSE: UBS) could be downgraded potentially by as many as three notches and Morgan Stanley recently said it expects a 2-notch cut and that it will not need to raise capital.

Also from February: Warnings of a two notch downgrade were handed out to Barclays PLC (NYSE: BCS), BNP Paribas, Credit Agricole, Deutsche Bank AG (NYSE: DB), Goldman Sachs Group Inc. (NYSE: GS) and HSBC Holdings PLC (NYSE: HBC). Bank of America Corporation (NYSE: BAC) and Nomura Holdings, Inc. (NYSE: NMR) were “only” given warnings of a possible one notch downgrade.

Here is how the stocks are moving today: J.P. Morgan Chase & Co. (NYSE: JPM) is down 2.1% at $35.69; Bank of America (NYSE: BAC) is down 3.6% at $7.84; Citigroup, inc. (NYSE: C) is down 2.8% at $28.03; Wells Fargo & Company (NYSE: WFC) is down only 0.7% at $32.58.  Goldman Sachs Group Inc. (NYSE: GS) is down 2.3% at $94.33 and Morgan Stanley (NYSE: MS) is down 1.1% at $14.04.

To show a final barometer… The highly volatile and triple-leveraged Direxion Daily Financial Bull 3X Shares (AMEX: FAS) is down 5.3% at $82.68 ahead of the call.

One question is how General Electric Co. (NYSE: GE) will fit into this as it was warned of a Moody’s downgrade in March.

We have been expecting this call for months, so it will be good to finally get the downgrade out of the way.  Now we just have to hope that the ratings are given a “Stable” outlook ahead. Otherwise we can all just expect more of the same overhang.

Our take is not that the downgrade matters very much here.  What matters is THE OUTLOOK.

JON C. OGG

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