Breaking News – 5 Major US Banks Downgraded! 10 Global Banks Also Cut!

by Jack Lee

AFTER HOURS UPDATE: Despite the bad news this week, the after hours trading on the NASDAQ could have been worse. It was solidly in the red, but percentage wise there was no indication of a panic sell off brewing.

Just after the stock market closed, Moody’s Investors Service cut the credit worthiness for five of America’s largest banks. Bank of America, JP Morgan, Citibank, Goldman Sachs and Morgan Stanley were all cut between one and two levels. Moody’s also cut the debt ratings on 10 other global financial institutions signalling a weakening US and global economy. It may take some time for this news to sink in, but when it does it could have a dramatic effect on the financial world. For Greece, and perhaps Italy and Spain, the timing of banking crisis couldn’t be worse. They are hoping for massive bailouts from the G-20 and this new twist might limit the amount of the money available or worse, halt it.

In a special Fox Business report: “Moody’s cited the banks’ shrinking growth and dimming profit forecast in explaining the downgrade. The ratings agency also highlighted the firms’ exposure to the capital markets at a time of significant market volatility.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” said Moody’s global banking managing director Greg Bauer in a statement.

Other non-U.S. banks that were downgraded include Barclays (BCS), BNP Paribas (BNP), Credit Agricole (ACA), Credit Suisse (CS), Deutsche Bank (DB), HSBC (HBC), Royal Bank of Canada (RY), Royal Bank of Scotland (RBS), Societe Generale (GLE), and UBS (UBS).

Credit Suisse suffered the biggest downgrade. Moody’s chopped the bank’s credit rating three levels, citing the Swiss bank’s exposure to the global capital markets business, heavy wholesale funding requirements, and earnings volatility. The company’s ADRs were down 3.8 percent, to $18.57, after hours.

This news mirrors another major concern for the Obama Administration, the nation’s employment numbers. Gallop poll shows unadjusted employment is flat so far in June and unemployment may be growing, but that report is still pending. To make matters worse, existing home sales fell 1.5% amid supply constraints according to the NAR report released yesterday.

These factors point to one conclusion, less revenue going to Washington. Less revenue means less money going to pay down the debt and that will get us quicker to the 17.3 trillion dollar debt ceiling much faster than analysts had previously estimated.

There’s a fair chance we could reach the debt ceiling before the November election and

if that happens it will greatly impact President Obama’s chances for re-election. Should the debt ceiling be reached Congress must act quickly to raise it again, and further cuts will automatically generate more cuts, thus undermining the US credit worthiness and threatening global economic repercussions.

The NYSE 250 point drop Thursday (6/21/2012) was the largest year to date, but all eyes are on Monday when the US markets open. Will the impact from this triple whammie cause a rout? Only time will tell.

(Update based on after hours trading) My personal best guess is the market will absorb the bad news in stride. We’ve become acclimated to such news, so it’s impact may be less that predicted. I’m going to say I doubt that we will have anything close to rout, but then again that’s just my personal feeling.

One last thing… the sun will still rise and the sky will not fall, because it’s just money.