Scrabbling for collateral
10 May 2012 New York
Image: Shutterstock
Moody’s are considering industry-wide downgrades, with Morgan Stanley taking a potential $9.6 billion hit.
After US financial stocks fell, the bank stated that counterparties may call $7.21 billion in additional collateral or termination payments if its rating is cut three levels by Moody’s, and two grades by Standard & Poor’s.
Though banks are counting on the shift towards central clearing to help mitigate the impact of a downgrade, Morgan Stanley would also have to post $2.4 billion in collateral to certain exchanges and clearinghouses, it said in a quarterly report filed with the SEC. This total is up from the estimated $6.52 billion recorded in the last quarter of 2011.
Citigroup is in a similar, though less severe predicament, foretelling that $4.7 billion cash would be needed to cover collateral for derivatives contracts and exchange margin requirements should its credit be downgraded by two levels.
Bank of America was the third bank that could suffer under a downgrade, reporting in a quarterly filing that it would have been required to post $5.1 billion in collateral if its had been downgraded two notches.
In a recent interview CEO of Morgan Stanley James Gorman defended the company, saying that he would be ‘surprised’ if Moody’s made these changes.
“We've had two years of potential ratings action now coming out of the crisis. I think they remain an important input, but not the only input. I think Moody's is on a mission, but this would be a late change – obviously, a lot closer to 2008 would have intuitively made more sense. Whether they end up moving to the more extreme ratings, I don’t know. Look at the US corporations. We've all come through the stress test quite strongly.”
Moody's is reviewing 17 financial institutions with global capital markets operations.
After US financial stocks fell, the bank stated that counterparties may call $7.21 billion in additional collateral or termination payments if its rating is cut three levels by Moody’s, and two grades by Standard & Poor’s.
Though banks are counting on the shift towards central clearing to help mitigate the impact of a downgrade, Morgan Stanley would also have to post $2.4 billion in collateral to certain exchanges and clearinghouses, it said in a quarterly report filed with the SEC. This total is up from the estimated $6.52 billion recorded in the last quarter of 2011.
Citigroup is in a similar, though less severe predicament, foretelling that $4.7 billion cash would be needed to cover collateral for derivatives contracts and exchange margin requirements should its credit be downgraded by two levels.
Bank of America was the third bank that could suffer under a downgrade, reporting in a quarterly filing that it would have been required to post $5.1 billion in collateral if its had been downgraded two notches.
In a recent interview CEO of Morgan Stanley James Gorman defended the company, saying that he would be ‘surprised’ if Moody’s made these changes.
“We've had two years of potential ratings action now coming out of the crisis. I think they remain an important input, but not the only input. I think Moody's is on a mission, but this would be a late change – obviously, a lot closer to 2008 would have intuitively made more sense. Whether they end up moving to the more extreme ratings, I don’t know. Look at the US corporations. We've all come through the stress test quite strongly.”
Moody's is reviewing 17 financial institutions with global capital markets operations.
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