JP Morgan is still hurting from the aftereffects of its big $2 billion trading loss, but it’s not the only bank feeling the pain.
JPM shares are continuing to plunge today, and is down around 2.7%. But even deeper in the red is Morgan Stanley, which is down over 3.7%.
Part of that is because JP Morgan’s blunder has inspired a loss of confidence in the financial industry overall; investors could also be worried about the other banks that do business with JP Morgan and the effect of the trading loss on that.
But another reason for Morgan Stanley’s fall is because the bank has been facing a possible two or three-notch downgrade from Moody’s, which would force the bank to put up significantly more collateral to counterparties in trades and might also handicap their derivatives business.
And while Morgan Stanley has been publicly touting its strengths and hoping for a downgrade of two levels instead of three, it’s very likely that JP Morgan’s $2 billion fiasco could potentially push Moody’s to make that downgrade three-notches, according to the Wall Street Journal—
“Having dealt with Wall Street over many years Moody’s knows the answer to the question, ‘Can a…leopard change its spots?’ ” [Sanford C. Bernstein analyst Brad Hintz] wrote in a recent report.
J.P. Morgan’s stumble could harden such thinking, potentially pushing Moody’s toward a three-notch downgrade for Morgan Stanley. Additionally, the change in political winds engendered by J.P. Morgan’s problem makes it even more unlikely the government would rescue a struggling firm, which could also play into Moody’s thinking.
In addition, Moodys just announced that they’ll be delaying downgrade decisions until after June reevaluate the effects of JPM’s loss and the Eurozone crisis, so Morgan Stanley may have more time to make their case to the ratings firm… or just more time to let the possible effects of an impending three-notch downgrade really sink in.
The Wall Street Journal also pointed out that JP Morgan’s bad bet could also hurt Goldman’s lobbying efforts against a new Fed regulation that limits banks’ exposure to each other, so MS isn’t alone in bearing the brunt of JPM’s mistakes.