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Here’s Why Everyone Is Freaking Out About Morgan Stanley’s Downgrade More Than Any Other Bank’s
Moody’s will downgrade 17 banks today, so everyone’s freaking out as expected.
That said: You may have noticed that a special kind of freak out has been reserved for Morgan Stanley.
You already know that not all banks are created equal, and Morgan Stanley’s mess is yet another example of that. They’ve admitted themselves (in their latest 10Q) that if their rating is downgraded by 3-notches (to Baa2, which is two notches above junk) their collateral costs will balloon like crazy.
Worse than that, they may have to put cash down immediately. Yep, a collateral call.
“In connection with certain OTC trading agreements and certain other agreements associated with the Institutional Securities business segment, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade. At March 31, 2012, the following are the amounts of additional collateral, termination payments or other contractual amounts (whether in a net asset or liability position) that could be called by counterparties under the terms of such agreements in the event of a downgrade of the Company’s long-term credit rating under various scenarios: $ 868 million (A3 Moody’s/A- S&P); $ 5,177 million (Baa1 Moody’s/ BBB+ S&P); and $ 7,206 million (Baa2 Moody’s/BBB S&P). Also, the Company is required to pledge additional collateral to certain exchanges and clearing organizations in the event of a credit rating downgrade. At March 31, 2012, the increased collateral requirement at certain exchanges and clearing organizations under various scenarios was $ 160 million (A3 Moody’s/A- S&P); $ 1,600 million (Baa1 Moody’s/ BBB+ S&P); and $ 2,400 million (Baa2 Moody’s/BBB S&P).”
Terrible. And even worse is what a deep cut could do to Morgan Stanley’s (and everyone’s) business. Black Rock’s Larry Fink said that his massive firm might have to stop doing business with some banks if their ratings are cut. Not, he said, because he wants to, but because he is contractually obligated to his clients to do so.
So boys and girls, hold on to your hats.