Stocks Tickers: MCO, MHP, XLF, GS, MS, MER, LEH, BSC, C, BAC, JPM, WFC, WB

You will have to have a subscription in order to access the full article, but Moody’s has an article stating that major US investment banking leveraged loan commitments do not imperil the firms’ underlying credit ratings and that they have sufficient liquidity to fund commitments.

The perceived problem here is that this is after the ratings agencies have been under scrutiny over a failure to adequately monitor ratings of outside firms with the proper scrutiny.  it hasn’t even been two weeks since Moody’s (NYSE:MCO) and S&P owner McGraw Hill (NYSE:MHP) were both being listed as being caught in the soup and not having been vigilent enough in their ratings.  That also happened after the Enron and Worldcom fiascos and has come back up front and center after this CDO and structured finance meltdown of the last 6 weeks.   You can look at the SPRD for financials and will see that this has had an impact, and here is the full composition of that SPDR. This is for the Financial Select Sector SPDR (AMEX:XLF)

This report out of Moody’s would probably be bringing more controversy if it wasn’t the week ahead of labor Day.  That being said, you’ll have to decide entirely on your own if Moody’s is accurate or if they are missing the boat again. 

There have been more rumors of ‘major broker/dealer leverage’ about to crush major firms, and just as many rumors refuting or giving the all-clear signal.  For that reason we are not addressing any of the rumored names to avoid any of the coverage issues that many are passing around Wall Street as if it is gospel.

Moody’s noted that these investment banks have ample enough earnings and are diversified enough to absorb the already known and coming mark-downs.  It states these will generate positive earnings, although at a lower level than over the recent periods.

Here is a list of major brokerage and investment banks in order of market capitalization that are listed as being able to absorb the malaise:

• Goldman Sachs (GS) $70 Billion in market cap.
• Morgan Stanley (MS) $63+ Billion in market cap.
• Merrill Lynch (MER) $62+ Billion in market cap.
• Lehman Brothers (LEH) $29 Billion in market cap.
• Bear Stearns (BSC) $15.7 Billion in market cap.

This may go a bit further than the intent, but this could also have implications in the money center banks that have large brokerage, trading, investment banking, and loan exposure internally and from outside funds.  As far as major money center banks that ‘could’ tie in to the report, these are the following (once again, in order of market cap only):

• Citigroup (C) $230 Billion in market cap.
• Bank of America (BAC) $221 Billion in market cap.
• JPMorgan Chase (JPM) $147 Billion in market cap.
• Wells Fargo (WFC) $119 Billion in market cap.
• Wachovia (WB) $91.5 Billion in market cap.

Once again, these stocks of investment banks and money center banks that cross over here on the leveraged and structured loan products are mentioned solely in order of market cap and are not necessarily any of the rumor stocks out there.  This also follows a downgrade of Bear Stearns (NYSE:BSC) just this morning by CIBC.  Just yesterday you can see where Merrill Lynch’s analyst that covers the sector made some key downgrades. We’ll see if this opinion changes after the layoffs at brokerage firms start coming out more.

Jon C. Ogg
August 29, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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