WSJ - Ratings Lowered on 11 banks

BUSINESS DECEMBER 20, 2008
S&P Lowers Ratings of 11 Banks

Citigroup, Goldman Among Banks Affected; Agency Gives HSBC Negative Outlook

By LIZ RAPPAPORT
Credit-quality watchman Standard & Poor's slashed the credit ratings of 11 global banks Friday, but the moves were largely ignored by the bond market, which has begun to look positively on the governments' efforts to save these institutions.
The agency reduced the debt ratings on Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley, Wells Fargo & Co., J.P. Morgan Chase & Co., and on European banks Barclays PLC, UBS AG, Credit Suisse Group, Royal Bank of Scotland Group PLC and Deutsche Bank AG.

RBS was among 11 global banks whose credit ratings were cut Friday by S&P.
S&P left HSBC Holdings PLC's rating pat, but gave the bank a negative outlook. The agency also warned that investors in the hybrid debt offerings sold by several banks may find their payouts cut if the economy and the financial markets remain tumultuous.
The actions "reflect our view of the significant pressure on large complex financial institutions' future performance due to increasing bank industry risk and the deepening global economic slowdown," says S&P in its report. The ratings agency now offers its analysis on the banks with and without the filter of current and expected government support, which it notes will eventually disappear.
Banks continue to feel the pinch from high levels of illiquid and hard-to-value assets stuck on their balance sheets, big appetites for risk, relatively weaker risk-management practices and pressure from regulatory bodies to deleverage, says the agency.
"The market has been viewing the ratings as too high and the ratings agencies wanted to bring them in line with that reality," said David Havens, a credit desk analyst at UBS Securities. "No one is surprised by this."
So some of the corporate bonds of the downgraded banks, including J.P. Morgan and Goldman Sachs, even rallied modestly Friday as investors continue to dip back into this market seeking some safe -- and higher yielding -- investments than U.S. Treasury bonds, whose yields have hit record lows.
The stock market was less positive, as shares of Citigroup fell 5.5% and Bank of America fell 1.2% Friday.
In more normal times, the lower credit ratings would mean that these institutions would pay higher rates to borrow money in the debt markets. But this negative is overshadowed by the government's many programs to give banks access to liquidity and to cheap funding. This means banks are able to issue debt at exceptionally low rates despite their deteriorating credit quality.
That won't last forever, and certainly lower credit ratings are damaging for a bank when dealing with counterparties in contracts and for funding in short- and long-term debt markets once the government programs go away.

For now, several firms, including Citigroup, J.P. Morgan, Morgan Stanley, Bank of America and others have issued tens of billions of debt backed with the "full faith and credit" of the U.S. Treasury through the Federal Deposit Insurance Corp.'s temporary program, which expires in spring 2009.
The FDIC's effort, combined with Federal Reserve liquidity programs and capital injections from the Treasury, is intended to help banks restore their balance sheets to health by stimulating their fundamental business model of borrowing at low rates and lending at higher rates. The market expects eligible issuers to borrow more than $400 billion of these bonds -- money they are required to use to lend to borrowers throughout the economy.
The S&P cuts also come a day after Moody's Investors Service slashed Citigroup's rating two notches Thursday night to A2, from Aa3.

Write to Liz Rappaport at liz.rappaport@wsj.com