In perhaps his last public comments prior to a key credit-rating decision, Morgan Stanley Chairman and Chief Executive James Gorman made his case to the market against a possible three-notch downgrade, telling investors that action would be “a somewhat stunning outcome” given how much the company has changed over the past four years.
Speaking at the U.S. Financials Conference in New York sponsored by his firm, Gorman reiterated that Morgan Stanley has the collateral and liquidity to “manage whatever outcome [will occur] if Moody’s [Investors Service] goes to the full extent of its guidance.”
Morgan Stanley is facing a potential three-level credit rating downgrade by Moody’s, a move that could lower the firm’s rating from A2 to Baa2, the second-lowest investment grade. In February, Moody’s put 17 global banks, including Morgan Stanley, on review for potential downgrades. A decision is expected by the end of June.
Morgan Stanley, the only major U.S. financial firm to be warned of a possible three-level cut, has disclosed that it may need to post $9.6 billion in additional collateral to counterparties and certain exchanges and clearing houses if two other ratings agencies were to follow through with such an action. Moody’s is the only one of the three major ratings firms to be weighing currently a downgrade of that magnitude.
Quoting Bruce Springsteen lyrics, Gorman said the firm is “dancing in the dark” about the review, adding that “nobody can tell me what Moody’s actions are going to be until we see what they are.”
To address some of Moody’s concerns about investment banking and capital markets, Gorman highlighted the firm’s $179 billion in cash, its strengthened risk-management functions, and steps it has taken to diversify sources of revenue, including the formation of a retail brokerage joint venture with Citigroup in 2009.