Bank downgrades too little too late

J. Keith Johnson Senior Writer, The Gold Informant
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Thursday evening, as markets were drawing to a close, Moody’s officially announced downgrades of 15 major banks. This came as no surprise, as rumors swelled throughout trading. Such rumors may have had some influence on the decline we saw in major indexes Thursday.

It’s sometimes difficult to know how to take these rating agencies. For instance, the big three, Moody’s, Fitch and Standard & Poor’s, are often paid by those who rate them. Obviously there is a very possible, if not likely, conflict of interest in such cases.

Perhaps this highlights the ironic accuracy of the criticism Moody’s received from banks, who accused them of “backward looking.” Of course, there’s a sense that they can be assessed only by looking at what they’ve done to get where they are. But the irony of it is that Moody’s downgrade is backward, in the sense that they’re running about two years or so behind in dropping the credit ratings of banks that have shown an incredible ability to manipulate markets and take irresponsible chances.

So which banks were downgraded? Bank of America, Barclays, BNP Paribas, Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Royal Bank of Canada, Royal Bank of Scotland, Societe Generale and UBS are included in banks that Moody’s global banking managing director, Greg Bauer, claims “have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities.”

Interestingly, Morgan Stanley’s stock went up on the release as investors were encouraged that the bank was only knocked down two notches rather than the three that were expected. Apparently much of the downgrade had already been priced in, especially in light of the fact that Morgan Stanley was lumped with the weakest four banks in the Moody’s report (including Bank of America, Citi and RBS).

What does this mean to you? Well, probably not a whole lot. Since most of us don’t have enough cash in any particular bank to exceed the FDIC insurance, our exposure in the U.S. can be pretty safe. And this downgrade had nothing to do with customer deposits. It’s about the exposure of the banks to poor investments. The only way it could affect customers is if they had a freeze, bank run or some other similarly calamitous event.

But if you’re an investor, you’ll want to keep an eye on these names. There might be some trades available, but being exposed to these companies is being declared by Moody’s to be a bit more risky than we might be comfortable with.

For the record, AAA-rated mortgage-backed securities destroyed massive amounts of wealth in the real estate bust in 2008. How did this happen? Credit rating agencies fell asleep at the wheel, failing to protect through honest assessment.

Interestingly, in light of recent sovereign downgrades from rating agencies, lawmakers in the E.U. are apparently calling for self-assessment of government creditworthiness. That would be akin to the wolf watching the sheep, or accepting a promise that pieces of paper are worth something simply because they say so. We tried that experiment in 1971, when the goldback became the greenback. How’s that working so far?

J. Keith Johnson’s Austrian and libertarian perspectives on current socioeconomic and geopolitical affairs are fueled by his insatiable desire to both discover and share the truth. A Goldco Direct affiliate, you’ll find his commentary on The Gold Informant website, as well as various Internet financial and news sites.