All eyes were on Moody’s last week in anticipation of and in response to its downgrade of a number of banks. The rumors had Morgan Stanley (MS) in line to be moved down three “notches,” but got by with only two. Its stock rallied on Friday after the Moody’s announcement late Thursday, a fact much cited by commentators. Today was a new day, however; the stock gave all of that back and quite a bit more.
The chart shows a bit longer perspective. In the top panel is the performance of MS stock, along with that of the S&P 500. Below that are the credit ratings from the three biggest agencies (I used the Moody’s categories along the axis; here’s a grid showing each firm’s rating classifications). At the bottom is the history of trading in the credit default swaps.
You can see that there was no early warning from the markets in advance of the financial crisis. The rating agencies weren’t lowering their assessments — and S&P even raised its rating in mid-2007, when the handwriting for the housing crisis was already on the wall. Stock investors were bidding up MS and there was no sign of worry among those looking for credit protection.
Lower credit ratings make it harder to oil the gears of finance, so that makes it harder for firms like Morgan Stanley to succeed. There is at least one thing working in investors’ favor: There’s an awareness of the problems, so the obliviousness shown the last time around isn’t there. But these firms still need to show that they realize it’s not business as usual (see the Citigroup item below) and that they have a realistic operating model for the future. (Chart: Bloomberg terminal.)
Bloomberg Markets published an outstanding story about Sherry Hunt, the woman who stood up to Citigroup and got $31 million in the process. It is stunning that Citi had not reformed its mortgage operation in the wake of the crisis. The comments on the story are worth reading, because they demonstrate the disdain that readers have for banks and their practices.
Tellingly, the story includes this sentence: “Investor demand was so strong for mortgages packaged into securities that Citigroup couldn’t process them fast enough.” After all the words that have been written about the crisis, that cuts to the heart of it. Without the big buy-side shops and institutional investors clamoring for mortgage securities, we wouldn’t have much of a crisis, something I wrote way back when in a posting about one hand clapping.
There are, these days, people who have billions and billions of dollars. There also is a tendency for journalists to attach “billionaire” to the names of those people, whether it’s relevant to the circumstances of the story or not. Pay attention to how many times your favorite sources do it.