Moody’s Follows Through on Banks’ Downgrade Threat

(eToro Blog) Late yesterday, after Wall Street closed, several of the world’s largest banking firms saw their credit ratings downgraded by Moody’s. Among the major banks which were downgraded were U.S.-based Bank of America, JP Morgan Chase and Citigroup, Germany’s Deutsche Bank, the U.K.’s Barclays, and Switzerland’s Credit Suisse. The investors’ services group cited concerns that their vast exposure to the global financial markets’ volatility endangered their balance sheet. According to the statement which accompanied the downgrades, there are significant risks of outsized losses and analysts say that the downgrades are a reflection of Moody’s belief that the banks’ repayment of debt is questionable.

Several of the banks issued statements following the downgrade, disagreeing with Moody’s assessment; Citigroup merely said that it strongly disagreed with the downgrade, while Morgan Stanley argued that Moody’s didn’t take into consideration the bank’s efforts to bolster its finances. Citigroup and Morgan Stanley were both among what Moody’s considers the “weakest banks,” with risk management problems or high volatility issues and though they acknowledge that the banks are implementing reforms and changes to their business strategy, they say that the success of those changes has not yet been tested.

To be fair, Moody’s did specifically mention that several banks, including HSBC and JP Morgan Chase, have what they believe to be reliable buffers and a more stable outlook which didn’t include a great deal of exposure to Eurozone debt, all of which could readily help those banks’ absorb crisis-generated shocks. Moody’s had forewarned markets of the impending downgrades earlier this year, and markets had accordingly priced in just such an event. Share prices of major U.S. banks that were downgraded suffered little if at all; Morgan Stanley actually gained 3.2% or $0.45 following the news, while JP Morgan saw its price gain $0.38.

The DJ30 plunged nearly 251 points yesterday, one of the worst declines this year, and largely attributed to data points which showed that the major global economies, specifically China and the U.S., were headed for even more of a downturn. The SPX500 also closed lower dropping nearly 31 points while the NASDAQ dropped 71 points.

Italian trader giannifreefall has a profitable short in the SPX500 as well as the DJ30, with gains of 73.33% and 18.18% respectively. The trader has a 3.76% allocation in the SPX500, which has provided him with the second highest return in the portfolio at 42.8%. OpenBook trader xjurokx improved his numbers on the SPX500 with several profitable shorts yesterday, which ranged from 1.50% to 5.68%. For the month, the German trader has allocated 45% of the portfolio to the SPX500, which has provided a gain of 6%; the trader’s profit for the last week was in the green at 7.8%.

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