Morgan Stanley Credit Rating May Be Cut by Moody's

Morgan Stanley Credit Rating May Be Cut by Moody's

Oct. 10 (Bloomberg) -- Morgan Stanley's credit rating may be cut by Moody's Investors Service, which said the financial market slump may hurt profit at the U.S. securities firm next year.

Moody's put Morgan Stanley's A1 long-term credit rating on review for a possible downgrade, according to an e-mailed statement. The ratings assessor also lowered its outlook for Goldman Sachs Group Inc.'s Aa3 long-term rating to negative.

Morgan Stanley dropped 26 percent in New York trading yesterday, the biggest decline in more than a decade, and Goldman fell 10 percent as a short-selling ban expired and concern grew about their earnings prospects. The New York-based firms have transformed themselves into bank holding companies and raised money from outside investors to help weather the credit market turmoil that toppled Lehman Brothers Holdings Inc.

``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,'' Moody's said. ``As well, customer and investor concerns regarding wholesale investment banks have also put pressure on Morgan Stanley.''

The Morgan Stanley review affects about $200 billion of debt, Moody's said. The ratings assessor affirmed its Prime-1 grade for Morgan Stanley's short-term debt. The outlook for Goldman affects $175 billion of debt, and the company's short- term ratings were also affirmed at Prime-1.

Moody's in August cut Morgan Stanley's long-term credit rating from Aa3. At A1, the firm now has the fifth-highest investment grade rating.

Fundraising

The bankruptcy of Lehman last month and the emergency sales of Merrill Lynch & Co. and Bear Stearns Cos. sparked concern that companies like Morgan Stanley that depend on debt markets will run out of financing.

For both Morgan Stanley and Goldman, the shift into bank holding companies regulated by the Federal Reserve may ``limit profit opportunities,'' while at the same time lowering risks, Moody's said today.

In another step aimed at winning the confidence of investors, clients and counterparties, Morgan Stanley is selling more than 20 percent of itself to Japan's Mitsubishi UFJ Financial Group Inc. for $9 billion. Goldman is raising $10 billion, including $5 billion from billionaire investor Warren Buffett.

Morgan Stanley and Mitsubishi UFJ have moved to quash speculation that the deal would collapse, as the U.S. firm's shares tumbled 48 percent this week. The deal will close Oct. 14 ``as planned,'' Mitsubishi UFJ spokesman Takashi Takeuchi said today in an interview.

Goldman Praised

Closing the investment will be ``critical'' for Morgan Stanley to keep its current credit ratings, Moody's said in today's release.

John Mack, Morgan Stanley's chief executive officer, last month lobbied the U.S. Securities and Exchange Commission to ban short selling, arguing that it was driving down the company's stock. Short sellers borrow stock and sell it, hoping to buy it back at a lower price. The SEC's temporary ban ended last night.

Egan-Jones Ratings Co. estimates that Morgan Stanley ``probably needs $30 billion of new equity to address concerns'' about its financial strength. The company has about $900 billion of assets and an equity market value of $15.9 billion.

Moody's praised Goldman's risk controls and its ``culture of communication and accountability.'' Goldman, run by Chief Executive Officer Lloyd Blankfein, has recorded $4.9 billion of credit market losses since August last year, compared with $15.7 billion at Morgan Stanley.

``Goldman's commitment to controls is noteworthy,'' said Moody's analyst Peter Nerby in the statement.

BLOOMBERG