Ratings agency Moody's Investors Service said Wednesday that the major U.S. investment banks are liquid enough to avoid any negative impact on their credit ratings from their leveraged loan commitments. Moody's said Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers have enough earnings strength to be able to handle loan markdowns and still generate positive earnings, though those earnings will be depressed. Many Wall Street banks are saddled with commitments to finance leveraged buyouts in the face of an abruptly stagnant market for low-rate loans. "This situation has potential liquidity and revenue implications for the firms, given the difficulties in distributing the loans in the secondary market and the decline in the market values of leveraged loans resulting from higher spreads," Moody's said. It believes, however, that the firms will remain liquid even if they have to fund their commitments and hold them on their own balance sheets. Standard & Poors, meanwhile, conducted a "stress test" to evaluate the ability of Wall Street banks to withstand crisis scenarios. Its conclusion was that conditions are worse than they were in H2 1998 and investment banking and trading revenue could fall 47% in H2 2007. 24/7 Wall Street notes that the ratings agencies themselves have been called on the carpet recently for failing to monitor their ratings properly.
Sources: MarketWatch, Reuters, 24/7 Wall Street, Bloomberg
Commentary: Do S&P, Moody's Deserve the Street's Heat? • Moody's Downgrading Subprime Mortgage-Backed Securities; S&P to Follow • Rating Agencies Could be Liable for Investor Losses -- Study
Stocks/ETFs to watch: BSC, DB, GS, MS, MER, LEH, C, MCO, MHP. ETFs: IAI, PKW, XLF, UYG, KCE
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