BIG Banks CLAWING Back for Redemption

Moody’s cut its ratings on 15 of the world’s biggest banks Thursday, downgrading them one to three notches to reflect their exposure to volatile capital market activities, which could result in heavy losses.

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Morgan Stanley (NYSE:MS) had its long-term debt rating lowered by just two notches, one level less than had been expected, sending its shares higher in after-hours trading. The downgrade left Morgan Stanley more highly rated than Bank of America (NYSE:BAC) and Citigroup (NYSE:C), but a notch below Goldman Sachs (NYSE:GS).

Credit Suisse (NYSE:CS) was the only bank to be downgraded three steps after having been warned by Switzerland’s central bank last week about weak capital levels.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” Moody’s Global Banking Managing Director Greg Bauer said in the announcement. The banks downgraded on Thursday faced diminished profitability and growth prospects due to difficult operating conditions, increased regulation, and other factors, Moody’s said.

The cuts will increase funding costs for Morgan Stanley and other banks, and as a result, trading partners may ask for more collateral. However, the impact of the changes will be somewhat mitigated by the fact that they were largely in-line with indications given by Moody’s months ago on how much the ratings were likely to be cut.

The only real surprise was Credit Suisse’s three-notch downgrade, according to Mark Grant, managing director at Southwest Securities Inc. “In fact, it was Morgan Stanley that was supposed to be downgraded by that amount and Morgan received only two notches of cuts.”

Two other banks also fared better than expected — UBS (NYSE:UBS) was bumped two rather than three spots, and HSBC (NYSE:HBC) was bumped one spot instead of a potential two.

Along with UBS, Barclays (NYSE:BCS), BNP Paribas, Royal Bank of Canada, JPMorgan (NYSE:JPM), Credit Agricole, Deutsche Bank, Citigroup, and Goldman Sachs were also downgraded two notches.

Bank of America, Royal Bank of Scotland (NYSE:RBS), and Societe Generale, along with HSBC, were all cut by one notch.

But not of the disposition to simply shoulder a blow, banks fought back, quickly responding to the cuts in the offensive.

Citigroup blasted Moody’s for its treatment of U.S. banks in general, while praising institution investors and the U.S. Congress for showing less respect for the agency.

“We have been especially surprised by Moody’s disproportionately adverse treatment of U.S. firms relative to banks in Europe,” Citigroup said in a statement.

Other banks were a bit more defensive, but still censured Moody’s for its irresponsible and what they claimed to be inaccurate assessment of their positions.

In a statement released following its downgrade, Morgan Stanley said its ratings “still do not fully reflect the key strategic actions we have taken in recent years.”

“With our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders.”

Bank of America spokesman Jerry Dubrowski said his bank has strengthened its governance and risk management, ending the first quarter of 2012 with record capital ratios, record liquidity, and substantial reserves.

“We have significant liquidity and resources to serve clients and customers as we have transformed the company,” he said.

Royal Bank of Scotland accused Moody’s of being “backward-looking” and said the ratings changes do “not give adequate credit for the substantial improvements the group has made to its balance sheet, funding, and risk profile.”

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