Adding fuel to the fire of a global slowdown, ratings agency Moody’s has downgraded five major American banks, including Morgan Stanley, JP Morgan Chase, Goldman Sachs, and Citigroup by 2 notches. Bank of America was downgraded one notch. Other global banks, including Barclays, Deutsche Bank, HSBC Holdings, and Royal Bank of Canada were also downgraded.
The downgrade could cost Morgan Stanley $5.2 billion in additional collateral postings and termination payments to derivatives counterparties and clearinghouses, according to the bank's filings with the Securities and Exchange Commission. The Moody's downgrade reflects how vulnerable the major banks are to the euro crisis through the sovereign debt they hold. Morgan Stanley avoided having its credit slashed by three notches, which would have cost the bank even more.
Reports of the pending downgrades added steam to a stock market selloff that left all three major indexes down nearly two percent on the day. Even though markets have been expecting the downgrade since Moody’s indicated last February that they would be coming, the Dow Jones Industrial Average lost 250 points, closing at 12,572. NASDAQ closed at 2,859, a loss of 71 points, and the S&P lost 30 points to close at 1,325.
Earlier in the day, Goldman Sachs effectively recommended that clients "sell" the S&P 500 because of concern of the weakening economy. Yesterday, the Federal Reserve lowered growth forecasts for 2012 and beyond by half a percentage point.