Downgrades of Morgan Stanley, Credit Suisse Group AG (CSGN) and 13 other global banks, announced by Moody’s Investors Service after months of speculation about dire fallout, were met instead by rallies in stocks and bonds.
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The cost to protect Morgan Stanley’s debt against losses dropped, and the shares rallied as much as 4.6 percent in extended trading yesterday after the ratings firm cut the bank by two levels rather than a threatened three grades. Credit- default swaps tied to Bank of America Corp., which was lowered to within two levels of junk along with Citigroup Inc. (C), also improved, along with those of Goldman Sachs Group Inc. (GS)
“American banks are stronger today than they were three years ago,” said Gerard Cassidy, a bank equity analyst with RBC Capital Markets, adding that market prices have long reflected concerns raised by Moody’s. “Yes, their ratings are lower, but is Citi tomorrow going to have to pay an extra 50 basis points for commercial paper? I don’t think so.”
The pending downgrades have weighed on banks since Moody’s said Feb. 15 it was reviewing 17 banks with capital-markets operations because of fragile confidence and tighter regulations that pinched revenue. Pressure mounted as Europe’s sovereign- debt crisis intensified and cast doubt on the health of some of the continent’s lenders.
By the time the results came out four months later, investors such as Thornburg Investment Management Inc.’s George Strickland said, the worst-case scenario for downgrades was already reflected in securities prices.
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