Three-rung drop would be 'somewhat stunning,' says Gorman

Three-rung drop would be 'somewhat stunning,' says Gorman
Morgan Stanley boss preparing for possible major downgrade by Moody's; hanging out there in the wind
JUN 12, 2012
By  John Goff
Morgan Stanley Chief Executive Officer James Gorman said a three-level credit-rating downgrade by Moody's Investors Service would be “somewhat stunning” given the firm's increased capital. Moody's has said it may reduce the rating on New York-based Morgan Stanley by as many as three levels when it announces the results of an industrywide review this month. Morgan Stanley can manage through any potential cut, Gorman said today at a conference in New York sponsored by his company. “If Moody's goes to the full extent of their initial guidance, we would find, given the numbers I just shared with you, that a somewhat stunning outcome, given the reality of how different the institution is from what it was,” Gorman, 53, said. “But we've prepared for all outcomes.” Gorman highlighted the increase in the firm's capital and liquidity since the financial crisis in his presentation to investors. The bank's liquidity reserve is 23 percent of total assets, up from 11 percent at the end of 2007, while its shareholder equity has doubled, he said. The maximum downgrade, which would be the largest among U.S. banks and place the firm's rating two levels above junk, may raise borrowing costs and force Morgan Stanley to post more collateral on trades. It would also threaten a fixed-income trading turnaround as some counterparties would no longer be able to do derivatives deals with the firm. “We're not panicked over this, but we're prepared for it,” Gorman said. “We'll make whatever business adjustments, if necessary, once we get there.” Moody's announced the review in February and originally slated the ratings actions for the largest banks for the middle of May. The ratings firm later delayed the action, saying it would make cuts by the end of June. “It's been a long process to be hanging out there in the wind waiting for this,” Gorman said. --Bloomberg News--

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