Morgan Stanley Will Have To Plunk Down A Huge Pile Of Cash If It Gets Hit With A Big Downgrade

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Wall Street’s been buzzing about an impending round of bank downgrades from ratings agencies for a couple of weeks now.Banks are concerned because if their ratings go down, their borrowing costs go up. Not only that, but BlackRock’s Larry Fink (a big client) has said that if the rating go down, he may be contractually obligated (to his clients) to sever some relationships on the Street (nothing personal).

He’s not the only one with that issue.

This is a problem for everyone, but the bank that everyone’s been buzzing about the most is Morgan Stanley. That’s likely because, in their March 31st 10Q, they mapped out how much money that could be called by counterparties AND how much more money they would have to use as borrowing collateral in the event of a one, two, or three-notch downgrade.

The big number that should freak you out is obviously the 3-notch — counterparties could call $7.2 billion and increased collateral requirements could jump to $2.4 billion according to the 10Q (via ZeroHedge).

That’s old news, though. MarketWatch reports that yesterday Morgan announced that the figure for collateral is more like $7 billion. Today their stock is down 1.01%.

On the other hand, traders are telling reporters that the downgrades are largely priced in and, unless we get a 3-notch downgrade situation, this event may be just… whatever.

One senior, London-based financial institutions banker told Financial News: “I don’t anticipate every rating announcement to precipitate material spread movement in terms of senior unsecured debt, because everything is heavily flagged and broadly priced in.”

We’ll see, for now, check out the ominous passage about all this in Morgan Stanley’s 10Q below (h/t ZeroHedge):

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 organisations in the event of a credit rating downgrade. At March 31, 2012, the increased collateral requirement at certain exchanges and clearing organisations 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).”

We’ll find out in June. We can barely take the suspense.

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