On July 16, Standard & Poor's revised the rating outlooks on three major institutional securities firms, citing a higher industry risk against a backdrop of a weaker operating environment. The outlooks on Morgan Stanley Dean Witter & Co. (MWD), Goldman Sachs Group Inc. (GS), and Merrill Lynch & Co. Inc. (MER) have been revised to "negative" from "stable."
The world is changing for institutional investment banks. Their underwriting prowess and advisory expertise are no longer sufficient to win attractive fees from their corporate clients. Increasingly, they must participate in some less attractively priced products, like senior bank loans and even commerical backup lines. Earning the right to play in their traditional intermediation markets this way, they become not merely intermediaters of credit, but must actually rent their own balance sheet. These developments result in higher industry risk.
The changes come amidst a downturn for the industry's most lucrative businesses, with M&A transactions and equity underwriting down sharply in 2001. The longer this slump continues, the greater the pressure on institutional securities firms to extend credit to maintain overall business activity.
This change occurred when large corporate banks -- notably J.P. Morgan Chase & Co. and Salomon Smith Barney Inc., backed by Citigroup Inc. -- reached such a level of credibility in the underwriting business that they could influence the handling of these transactions. Besides their recently achieved level of expertise, the issue is also their willingness to use their own or their affiliated bank's balance sheet to book large corporate loans. The large banks have significantly larger capital foundations to put at risk, compared to the major institutional securities firms. From Standard & Poor's CreditWire