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Moody's May Cut Ratings on 40-50 Banks After Protests (Update2)
April 3 (Bloomberg) -- Moody's Investors Service plans to cut the credit ratings on 40 to 50 banks in Europe and North America, reversing upgrades after a new rankings system was panned by Merrill Lynch & Co. and JPMorgan Chase & Co.
Moody's, whose founder created credit ratings in 1909, will identify the banks today, Christopher Mahoney, a senior managing director at the New York-based company, said in a March 30 interview. Merrill analyst Richard Thomas in London criticized as ``perverse'' the revision that gave three Icelandic banks the same top Aaa ratings as the U.S. Treasury and Exxon Mobil Corp.
The about-face means some bank rankings may fall two or three grades after reviews that end April 10, Moody's said March 30. Moody's last quarter raised the ratings of 150 banks, saying they merited higher grades because they were based in countries that are likely to bail them out in a crisis.
``We've been very engaged in a dialogue with investors,'' said Mahoney, who leads the credit policy committee at Moody's. The new ratings ``will be very responsive to the market's concerns,'' he said.
Eighty-five percent of investors in a Merrill survey last month said Moody's had lost credibility because of the approach. Shares of Moody's have fallen 11.2 percent this year to $61.28, compared with a rise of 0.90 percent for the Standard & Poor's 500 Index.
``It's not as if they've done it voluntarily,'' JPMorgan analyst Ben Ashby in London said. ``They've done it because everyone's ridiculed them. If they want to rebuild credibility, I would spend a few years producing very high quality bank research. But that's very tricky to do.''
The company examined 210 banks in North America and northern Europe for the new joint default analysis criteria system, which began Feb. 23. Moody's said it will identify which banks will be cut late today in New York.
``A lot of banks have been very upset, and it's going to take time to repair the bridge,'' Tom Jenkins, a senior credit research analyst at Royal Bank of Scotland Group Plc in London, said in an interview. ``I don't think this turnaround will necessarily be the magic pill.''
Moody's raised its ratings on Kaupthing Bank hf, Glitnir Banki hf and Landsbanki Islands hf, Iceland's biggest lenders, by four or five grades to Aaa because the government probably would rescue the companies if they had financial difficulties. Fitch Ratings has kept its ratings on the banks' bonds at A, its sixth- highest investment grade.
Bondholders say Iceland's banks don't merit the top credit ratings. The cost to protect 10 million euros ($13 million) of Kaupthing's debt for five years using credit-default swaps is 40,000 euros a year. That compares with 7,000 euros to insure the bonds of Amsterdam-based ABN Amro Bank NV, which has a lower Aa1 rating. Investors use default swaps to bet on a company's ability to repay debt.
Hungarian lender OTP Bank Nyrt. received a three-step boost to Aa1, four levels higher than the nation's rating. Moody's justified the ranking by saying some governments are willing to pay off bank debt before sovereign obligations to prevent a banking crisis.
The new system relied too much on assumptions about government support, said John Raymond, a London-based analyst at CreditSights Inc. The independent bond research firm said last month that it wouldn't use Moody's ``worthless'' new ratings in a report titled ``Moody's Makes Aaas of Itself.''
``They were just applying it too literally,'' Raymond said in an interview. ``They weren't giving enough of a sense of the quality of the bank and whether it would go through a bad patch.''
Moody's new criteria would have opened the door to careless borrowing, said Jenkins at Royal Bank of Scotland.
``A bank that's now Aaa could take on loads of cheaper debt even if they don't have the cash flow or capacity to handle it,'' he said.
Moody's last week named a new head of global bank ratings. Michel Madelain will oversee ratings for the world's biggest banks, a position that had been unfilled for a year, the company said. Madelain, who joined Moody's in Paris in 1994, was group managing director for European corporate finance. Michael West will take over his previous role.
Moody's founder, John Moody, created the letter grades for the credit-rating business in 1909 by rating U.S. railroad bonds. Moody's, S&P and Fitch Ratings now control 95 percent of the credit-rating business.
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