Goldman Far Outperforms Morgan Stanley in 2008 - Moody's

It hasn’t been a good week for investment banks turned bank holding companies Goldman Sachs Group (NYSE:GS) and Morgan Stanley (NYSE:MS).

Both reported their first quarterly losses as public companies this week. And Moody’s Investors Service cut both companies’ ratings on non-FDIC-insured debt one notch to “A1” from “Aa3” for Goldman and to “A2” from “A1” for Morgan Stanley.

Moody’s is maintaining a negative outlook on the companies, meaning that more ratings cuts could come in 2009.

The Financial Times reports that Goldman’s rank and file got to share in the bad news this week after they were notified that their 2008 bonuses were slashed by 80 percent.

Today, Moody’s released a special comment elaborating on its downgrades and pointing to what it called the outperformance “by a wide margin” of Goldman’s core business when compared to Morgan Stanley’s.

This analysis demonstrates that Goldman Sachs outperformed Morgan Stanley by a wide margin, as the latter’s core franchise earnings were overwhelmed by asset write-downs during the year. This was an important factor in our ratings discussion and the rating outcome for the two firms relative to each other.

The Wall Street Journal online pointed out that Morgan Stanley’s quarterly results were boosted by the firm’s buyback of more than $2 billion of its own debt. But as the WSJ graphic below shows, the firms’ credit default swap spreads reflect greater market skepticism about Morgan.

Regardless of where Goldman and Morgan stack up vis-à-vis one another, Moody’s points to the biggest factor clouding the outlook at both companies: the global recession and “hostile capital market conditions in 2009 and possibly beyond.”

For details, see “2008 Operating Performance - A Factor in the Ratings Actions on Goldman Sachs and Morgan Stanley.”

Comments

[Vox Rationalis:]

"But as the WSJ graphic below shows, the firms’ credit default swap spreads reflect greater market skepticism about Morgan."

Skepticism about Morgan in the extraordinarily thinly traded, highly speculative CDS market, that is. CDS spreads say little about performance, and much about that particular segment's opinion of the chances a particular firm will go out of business in the next five years.

Remember what happened to the CDS spreads on Berkshire Hathaway in November? That in and of itself is sufficient to call into serious question any analysis that uses CDS spreads as an much more than a measure of fear.

2008 Dec 19 02:48 PM