Bank downgrades

The announcement after trading hours yesterday from Moody’s that it had downgraded a range of banks had been anticipated for months: indeed, Moody’s took great pains to telegraph its actions starting as far back as February.  So, when the big moment came, there was actually relief that some of the downgrades were not as deep as feared, and the costs of insuring the debt of these banks against default actually dropped.   The simple fact is that debt ratings are opinions – no more, no less.  True, we have somehow incorporated these opinions into all sorts of regulations (investment guidelines, SEC regulations, etc.), but at the end of the day people are generally free to do what they wish with these opinions.  Did anything change yesterday to cause the ratings to drop? No, these new ratings reflect the opinions of one firm (Moody’s) based upon the events of the past 2-3 years, not recent history.  And like with any opinion, the market is free to ignore it, so it should be no surprise that bank names, like Morgan Stanley, were up 10% on the opening bell today.