It'll just have to depend how Moody's fucking feels, okay? This is an art, not a science.
New York, October 09, 2008 -- Moody's Investors Service placed the long-term debt ratings of Morgan Stanley (senior debt at A1) and its subsidiaries on review for downgrade. All short-term ratings were affirmed at Prime-1.
Moody's review is based upon its expectation that an extended downturn in global capital market activity will reduce Morgan Stanley's revenue and profit potential in 2009, and perhaps beyond this period. In addition to the depressed market environment, Morgan Stanley will need to adapt the firm's business activities and balance sheet to operate in a bank holding company structure. This could limit profit opportunities for Morgan Stanley, though the firm's risk profile could be lowered, thus mitigating this concern.
As well, customer and investor concerns regarding wholesale investment banks have also put pressure on Morgan Stanley. Investor, counterparty and customer confidence is critical to the funding and profit generation of the firm, especially in a hostile market environment. During its review, Moody's will focus on the success of the actions that management takes to alleviate these confidence pressures and maintain customer franchises, while retaining key producers in a difficult environment.
Moody's also said that, in its view, Morgan Stanley's recent performance has been relatively solid, it has acted to solidify its capital base, it has maintained a good liquidity profile, and it has benefited from a level of systemic support that is factored into the rating. The benefits of these attributes relative to the risks cited above will be considered by Moody's during its ratings review.
Morgan Stanley has reported $4.0 billion in income in the first nine months of 2008, though this included gains from credit spread widening on its own debt and asset sales. Nonetheless, Morgan Stanley has been able to outperform many peers who reported substantial losses over the same period. This performance and Morgan Stanley's profitable and diversified franchises in investment banking, capital markets, retail brokerage business and asset management support the current ratings.
Moody's noted that Morgan Stanley has moved quickly during this extended crisis to de-risk the balance sheet and reduce leverage. The firm reported a 12.7% Tier One capital ratio at quarter end. Moody's expects that the investment by Mitsubishi-UFJ will close as scheduled on October 14, 2008. This will increase Morgan Stanley's capital base through an injection of $3 billion of common equity and $6 billion of preferred equity. Moody's views the closing of the Mitsubishi-UFJ capital injection as critical to maintaining current rating levels in light of the more challenging business conditions for wholesale investment banks.
According to Moody's, Morgan Stanley has a good liquidity profile. The firm maintains a high-quality liquidity pool sufficient to cover a wide variety of potential demands such as a contraction in collateralized funding terms, changing margin requirements, outflows of customer balances, and potential loan commitments in addition to normal debt maturities. The firm's prime brokerage business is largely self-funded and the firm is careful to finance primarily liquid collateral. The firm's balance sheet has substantially declined in the past year, reducing total funding demands.
Moody's also said that recent actions by regulators during the credit crisis raise questions as to the level and certainty of support that firms such as Morgan Stanley would receive in market crises. However, Moody's recognizes that the numerous actions by regulatory authorities to support the industry do lower the risk to creditors. These include the rapid approval of Morgan Stanley's application to become a Federal Reserve regulated bank holding company, and expanded liquidity provision under the Term Securities Lending Facility and Primary Dealer Credit Facilities. Moody's current A1 rating reflects this support, and Moody's views it as a significant source of credit enhancement necessary to maintain Morgan Stanley's current rating level.