Credit Suisse’s rating was cut three levels to A2 and Zurich- based UBS AG (UBSN), the other firm singled out for a potential three- level cut, was lowered two instead. 
 
 Credit Suisse’s rating was cut three levels to A2 and Zurich- based UBS AG (UBSN), the... Read More 
 
 Credit Suisse’s rating was cut three levels to A2 and Zurich- based UBS AG (UBSN), the other firm singled out for a potential three- level cut, was lowered two instead. Close 
 
 Moody’s Investors Service suffered a downgrade of its own as markets responded to the company’s rating cuts of 15 of the world’s largest banks by bidding up the value of their stocks and bonds. 
 
 Shares of 12 of the firms affected by yesterday’s action rose as of 11:38 a.m. in New York, and the cost to protect Morgan Stanley (MS) debt against losses dropped to the lowest in more than seven weeks, according to data compiled by Bloomberg, after the bank was cut two levels rather than a threatened three grades. Credit-default swaps tied to Bank of America Corp., which was lowered to within two levels of junk along with Citigroup Inc. (C), also improved. The Bloomberg Europe Banks and Financial Services Index added as much as 1.5 percent. 
 
 “The ratings agencies themselves are looking for a raison d’etre” as regulations in the U.S. and Europe try to reduce investors’ dependence on the credit assessments, David Zervos, chief market strategist at Jefferies & Co., said in an interview on Bloomberg Television’s “Market Makers.” “They like to be noisy, and this is a way to be noisy. I don’t think the effects are big in the end.” 
 
 The prospect of downgrades had weighed on banks since Moody’s said Feb. 15 it was reviewing 17 financial firms with capital-markets operations because of fragile confidence and tighter regulations that pinched revenue. Pressure mounted as Europe’s sovereign-debt crisis intensified and cast doubt on the health of some of the continent’s lenders. 
 
 Market ‘Shrugging’ 
 
 By the time the results came out four months later, investors such as Thornburg Investment Management Inc.’s George Strickland had concluded the worst-case scenario for downgrades was already reflected in securities prices. 
 
 “If anything, the market is reacting with relief,” said Strickland, who helps oversee $14 billion of fixed-income assets as a managing director at Santa Fe, New Mexico-based Thornburg. Morgan Stanley bonds likely will rally, said Strickland, whose firm owns the firm’s debt. “The market is shrugging it off.” 
 
 The review concluded with none of the financial firms cut more than Moody’s had forecast, removing a drag on bank stocks brought on by the uncertainty, David Konrad, a KBW Inc. analyst in New York, wrote today. 
 
 “We view the Moody’s downgrade as another overhyped story of 2012,” David Trone, analyst at JMP Securities LLC, wrote to his clients. “The corporate market thinks for itself and credit rating agencies are often lagging indicators.” 
 
 Stocks React 
 
 Financial stocks in the Standard & Poor’s 500 Index climbed 0.8 percent at 11:21 a.m. New York time, the biggest gain among 10 industries, according to data compiled by Bloomberg. JPMorgan Chase & Co. (JPM) advanced as much as 2.8 percent and ranked among the two biggest gainers in the Dow Jones Industrial Average. 
 
 Credit-default swaps on New York-based Morgan Stanley declined 28 basis points to 353.3 basis points as of 10:21 a.m. in New York, according to data compiled by Bloomberg. That’s the lowest on an intraday basis since May 4. Swaps are used to protect investors against losses on company debt, and the price increases along with doubt about a firm’s creditworthiness, so today’s decline reflects an improving outlook. 
 
 Morgan Stanley’s long-term senior unsecured debt rating was reduced two grades to Baa1, and nine other firms received two- level reductions, Moody’s said yesterday in a statement. Credit Suisse Group AG (CSGN)’s rating was lowered three levels to A2 and Zurich-based UBS AG (UBSN), the other firm singled out for a potential three-level cut, dropped just two instead. 
 
 European Banks 
 
 HSBC Holdings Plc (HSBA), Europe’s largest bank, was lowered one grade instead of two, while Barclays Plc (BARC) was reduced two steps. Edinburgh-based Royal Bank of Scotland Group Plc (RBS) was lowered one step, as was London-based Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender. 
 
 “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,” Greg Bauer, Moody’s global banking managing director, said in the statement. 
 
 The 43-company Bloomberg Europe Banks and Financial Services Index erased earlier losses and rose 0.1 percent to 73.01. Credit-default swaps on Barclays, BNP Paribas and Societe Generale all fell, according to prices compiled by Bloomberg. 
 
 Credit-default swaps on Goldman Sachs slid 16.9 basis points to 277.4 basis points, the lowest since May 8, and Citigroup decreased 13.4 basis points to 245.6, Bloomberg prices show. A basis point is 0.01 percentage point. 
 
 Stronger Now 
 
 “American banks are stronger today than they were three years ago,” said Gerard Cassidy, an analyst with RBC Capital Markets, adding that market prices have long reflected concerns raised by Moody’s. “Yes, their ratings are lower, but is Citi tomorrow going to have to pay an extra 50 basis points for commercial paper? I don’t think so.” 
 
 In March, a month after announcing its review, Moody’s cut Sydney-based Macquarie Group Ltd. (MQG) and Tokyo-based Nomura Holdings Inc. (8604) one level each. Nomura is rated lowest of the 17 firms at Baa3, one grade above junk. 
 
 The downgrades reflect risks that the market has recognized for years, investors said. The S&P 500 Financials Index dropped 61 percent over the last five years, while the Bloomberg European banks index (BEBANKS) is down 75 percent. Morgan Stanley’s swap prices are more than double what they were a year ago, while Citigroup’s have jumped about 70 percent. 
 
 Advance Warning 
 
 “Moody’s is not going to detect some problem in advance and move a rating to warn the public,” said Ken Fisher, chief executive officer and founder of Woodside, California-based Fisher Investments, which has about $44 billion under management. “Whether it’s a stock or a bond, the free market already did that. Moody’s goes along afterwards and effectively validates what the market’s already done.” 
 
 Large U.S. banks had ratings in the Baa range -- similar to BBB at Standard & Poor’s -- in the 1980s and early 1990s, said David Hendler, an analyst at CreditSights Inc. in New York. That era followed Latin America’s sovereign-debt defaults of the 1980s, which forced lenders to set aside funds to cover bad loans to countries there. 
 
 “It’s almost like they’ve come full circle back to triple- B,” Hendler said. “The industry has been through a triple-B phase before, and they will come back from it.” 
 
 Collateral Impact 
 
 While bank stocks and bonds initially climbed yesterday, the downgrades may have longer-term effects on operations, forcing some firms to post more collateral to trading partners in derivatives deals. 
 
 Citigroup and Bank of America, as the lowest-graded companies after Nomura, may be at a disadvantage in businesses such as trading derivatives that aren’t centrally cleared. That market provides about 15 percent of the industry’s trading revenue, Kinner Lakhani, a Citigroup analyst, wrote in an April 30 note. Both firms lost market share among the top nine banks in fixed-income trading last year, according to Bloomberg Industries. 
 
 “For the banks that are in the BBB category, I’m sure that will have a negative impact on their ratings-sensitive businesses, like derivatives,” Anil Lalchand, a credit analyst at DoubleLine Capital LP in Los Angeles, which manages $35 billion, said in a telephone interview. 
 
 While higher-rated banks such as JPMorgan and HSBC received credit for retail businesses that serve as “shock absorbers” from the volatility of capital-markets-related units, Bank of America and Citigroup’s consumer divisions were “thinner or less reliable” cushions, Moody’s said. 
 
 Future Downgrades 
 
 All the U.S. firms remained on negative outlook, which means their grades could be cut again, because government support may wane, Bob Young, managing director of North American banking for Moody’s, said in an interview. 
 
 Morgan Stanley, owner of the world’s biggest brokerage, avoided the largest potential downgrade because of possible support from Mitsubishi UFJ Financial Group Inc., according to Moody’s. Morgan Stanley CEO James Gorman also cited his firm’s capital ratios in meetings with Moody’s to convince the ratings company that a three-level cut wasn’t deserved. 
 
 The rating cuts underscore how much less creditworthy Moody’s views global banks compared with smaller rivals. Minneapolis-based U.S. Bancorp, the fifth-largest U.S. bank by deposits, is still rated Aa3, five levels higher than fourth- ranked Citigroup or Charlotte, North Carolina-based Bank of America, which is second behind JPMorgan, according to data compiled by Bloomberg. 
 
 Banks Respond 
 
 Citigroup said in a statement that the downgrade was “arbitrary and completely unwarranted,” and called Moody’s approach “backward-looking.” Morgan Stanley said its ratings don’t reflect the actions it has taken to cut risk. Credit Suisse said it was pleased to remain among the top-rated large banks, while Bank of America said it has strengthened its capital and risk management. 
 
 The reductions by Moody’s are “a mea culpa from 2007 and 2008,” said James Leonard, a credit analyst in Chicago at Morningstar Inc. (MORN) “The banks have gotten so much better in the last few years in terms of capital, yet their ratings keep going down. What does that tell you? That the ratings were so wrong before.” 
 
 To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net 
 
 To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net ||||| Emmanuel Dunand/Agence France-Presse — Getty Images 
 
 
 
 Already grappling with weak profits and global economic turmoil, 15 major banks were hit with credit downgrades on Thursday that could do more damage to their bottom lines and further unsettle equity markets. 
 
 The credit agency, Moody’s Investors Service, which warned banks in February that a downgrade was possible, cut the credit scores of banks to new lows to reflect new risks that the industry has encountered since the financial crisis. 
 
 “The risks of this industry became apparent in the financial crisis,” said Robert Young, a managing director at Moody’s. “These new ratings capture those risks.” 
 
 Citigroup and Bank of America, which have struggled to fully recover from the financial crisis, were among the hardest hit. After the downgrades, the banks stand barely above the minimum for an investment grade rating, a sign of the difficult business conditions they face. 
 
 Article Tools 
 
 Executives at the banks argued on Thursday that the new ratings failed to reflect the safeguards and changes that they had put in place in recent years. 
 
 The cuts come at a time of tumult within the industry. Banks have struggled to improve their profits against the backdrop of the European sovereign debt crisis, a weak American economy and new regulations. 
 
 The downgrades may amplify their problems. With lower ratings, creditors could charge the banks more on their loans. Big clients may also move their business to less-risky companies, further crimping earnings. 
 
 As bank profits falter, consumers could also be affected. Companies often try to make up for lost revenue by passing costs on to customers. 
 
 In the face of new regulations, banks have raised fees and other sources of income to bolster their business. 
 
 Moody’s downgrades are part of a broad effort to make its analysis more rigorous. During the financial crisis, Moody’s and its rivals got a black eye for placing high ratings on mortgage bonds that later imploded. 
 
 Moody’s approach reflects its belief that large banks have weaknesses that could still hurt their creditors. 
 
 Along with Citigroup and Bank of America, the credit rating agency took action on 13 other banks, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Credit Suisse, Deutsche Bank, UBS, HSBC, Barclays, BNP Paribas, Crédit Agricole, Société Générale, Royal Bank of Canada, and Royal Bank of Scotland. 
 
 But some analysts feel that Moody’s is playing a game of catch-up. The latest actions, say critics, are backward-looking and do not consider the measures that banks have taken to strengthen themselves, including raising capital and getting out of certain risky businesses like proprietary trading. 
 
 “I feel that Moody’s action is five years too late,” said Gerard Cassidy, an analyst with RBC Capital Markets. 
 
 The threat of a downgrade has rippled through the markets for months. After Moody’s held out the prospect of a three-notch downgrade for Morgan Stanley in February, the bank’s shares dropped by more than 25 percent. Moody’s ended up cutting the firm’s rating by two levels. 
 
 Now, bank executives will try to convince their creditors and large customers that Moody’s has overreacted. 
 
 On Thursday, Citi said in a statement that Moody’s approach “fails to recognize Citi’s transformation over the past several years,” adding that “Citi strongly disagrees with Moody’s analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted.” 
 
 Bank of America echoed such sentiments: “In addition to strengthening our governance and risk management, Bank of America ended the first quarter of 2012 with record capital ratios.” 
 
 Those capital positions, which are banks’ main buffer against losses, could be a point of strength across the industry. The lack of capital in the crisis left the financial system vulnerable, prompting the government to bail out many of the largest banks. Since then, they have increased their cushions. Today, Morgan Stanley’s capital is twice what it was in 2007. 
 
 “The banking system is safer today than any time in the last 30 years,” said Mr. Cassidy. “We have not seen capital levels like this since the 1930s.” 
 
 Even so, Moody’s remains concerned. In its report Thursday, the credit rating agency said it saw several weaknesses in the banks’ Wall Street operations, including their complexity and opacity. Moody’s highlighted a history of volatile profits and problems with risk management. 
 
 In its review, Moody’s mentioned the recent trading debacle at JPMorgan Chase. In May, the bank disclosed that a bet on financial instruments tied to corporate bonds had soured; those losses could reach $5 billion. 
 
 The agency also noted the industry’s continued dependence on short-term loans to finance their Wall Street operations. This type of credit dried up quickly in the crisis, forcing them to borrow from the government. 
 
 Some banking experts welcomed the downgrades, saying the credit rating agencies were finally beginning to reflect the risks within large banks. “These downgrades are good news,” said Anat R. Admati, a professor of finance and economics at Stanford University. “Right now, their balance sheets are very fragile.” 
 
 The downgrades could widen the divide in the banking system. 
 
 Some customers may simply choose to transfer their business from the lowest-rated banks. One beneficiary may be JPMorgan Chase. It was downgraded two notches but still has a higher rating than Goldman Sachs. 
 
 Moody’s may cut some of its ratings still further once a critical part of the financial overhaul comes into place. The Dodd-Frank legislation aims to give regulators the power to wind down large banks and inflict losses on banks’ creditors in the process. Once these powers take effect, Moody’s may downgrade the banks to reflect the fact that the government is less likely to bail out large banks. 
 
 Some analysts see the downgrades as only one step toward making the financial system safer. For one, the country does not have a coherent solution for dealing with large banks when they run into trouble, said Mike Mayo, an analyst with Crédit Agricole Securities. 
 
 “Will actions like this make the banking system safer? The jury’s still out on that,” said Mr. Mayo. “That’s unfortunate four years after the crisis.” 
 
 This post has been revised to reflect the following correction: 
 
 Correction: June 23, 2012 
 
 An article on Friday about a credit downgrade of 15 large banks by Moody’s Investors Service misstated, in some editions, its cut for Bank of America. Bank of America’s credit rating was cut by one notch, to Baa2, from Baa1; it was not cut by two notches.
– Moody's warned that the ax was coming, and today it came. The credit rating agency downgraded 15 major financial firms today in a move that is sure to hurt their bottom lines and rattle markets, the New York Times reports. Moody's knocked Credit Suisse down by three levels, Morgan Stanley by two, and left Bank of America and Citigroup just two ranks above junk, reports Bloomberg. JPMorgan and Goldman Sachs also went down two notches. The downgrades are a major blow to banks, which are already struggling to deal with regulations, a struggling US economy, and a sovereign debt crisis in Europe. But Moody's was determined to be rigorous after going easy on financial firms before the financial crisis. Affected banks will face higher borrowing costs and damaged core business in areas like derivatives. They will also go on offense, trying to convince customers that Moody's has overreacted: "We believe the ratings still do not fully reflect the key strategic actions we have taken," said Morgan Stanley in a press release.