While not dramatic, the fact that S&P cut the ratings of three of Wall Street’s biggest investment banks last night is another grim portent of hard times ahead.
Lehman, Merrill and Morgan Stanley all dropped a notch on the rating scale.
The cause for all three actions is, believe it or not, more writedowns looming on the horizon.
But the rating actions in themselves will also make things worse.
As analyst Brad Hintz at Sanford Bernstein pointed out on Monday, single A rated firms do not make for desirable fixed income trading partners. Analysts are so far predicting a top-end drop of around 2 per cent to fixed income trading revenues, long term.
In the short term though, all three brokerages will be on the hook to much bigger margin calls.
Bloomberg - very helpfully recalling some of the footnoted ephemera it so often ignores - puts some numbers behind the point:
In its last quarterly filing, Merrill said a one-notch downgrade of its credit rating would require it to post an additional $3.2 billion of collateral on over-the-counter derivative trades.
Morgan Stanley estimated in a regulatory filing that a single level downgrade would mean posting an extra $973 million. Lehman said a one level downgrade requires about $200 million of additional collateral.
Missed that? Nevermind writedowns, Merrill, by its own estimation, is facing $3.2bn of margin calls over the next few days.
It was Lehman’s share price, though, that really took a beating - down 8.1 per cent over the day. It reports its Q1 earnings in a fortnight’s time. The real issue driving selling of course, nothwithstanding rating downgrades, is news from the WSJ that the bank might be making a $4bn cash call. All that, on top, don’t forget, of a series of cash raising sales.
