NEW YORK (Reuters) - Standard & Poor’s in a sweeping move on Monday that rocked markets cut ratings on a number of major U.S. securities firms including Lehman Brothers Inc and said outlooks on the large U.S. financial institutions are now mostly negative.
Other major firms downgraded were Merrill Lynch & Co Inc and Morgan Stanley.
“The outlooks on the large financial institutions sector in the U.S. are now predominantly negative,” the credit rating agency said in a statement.
U.S. stocks extended their losses, the investment grade derivative index widened and Treasuries prices hit session highs after S&P’s move indicated that financial institutions are still vulnerable to the U.S. mortgage and credit crisis.
“The market’s a little surprised with the timing and the breadth of the actions,” said Ricardo Kleinbaum, analyst at BNP Paribas in New York, adding, however: “I didn’t see anything in particular that was a revelation.”
“To have something like this come out so close to the reporting dates, at least for the brokers, suggests that S&P might be aware of a soft second quarter,” Kleinbaum said.
Financial institutions have already written down over $350 billion in losses related to risky subprime mortgages globally and S&P said they face more write-offs.
“The negative actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,” S&P said.
The rating agency also said it may downgrade Wachovia Corp, following the bank’s statement on Monday that it ousted its chief executive, Ken Thompson.
The rating will remain under review “until further clarification can be received regarding the abrupt departure of the CEO and whether there is a substantive change in Wachovia’s core businesses’ operating projections,” S&P said.
S&P also revised its outlook to negative on Bank of America Corp and JPMorgan Chase. The outlook indicates the likely direction of the rating over the next two years.
S&P removed Citigroup from CreditWatch negative, affirming its ratings, and also changed its outlook to negative.
Reporting by John Parry, Anastasija Johnson and Karen Brettell; Editing by James Dalgleish
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