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Moody's ratings cut for giant banks: a new weight on US economy

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“The downgrade itself is not a waterfall event nor will it trigger a sudden decline in economic activity,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “A few marginal borrowers may be turned down for loans at best.”

Mr. Dickson worries that the downgrade is yet another psychological hurdle for consumers. After watching some of the largest banks in the nation have their debt downgraded, consumers may decide to hunker down. “I think there is more psychological damage than real damage,” he says.

Moody’s downgraded the long-term senior debt ratings of four banks by one notch, while the ratings of 10 financial companies were downgraded by two notches, and one firm had its ratings lowered by three notches. A notch is simply a credit level.

A bank's credit rating is an important indication of what outside organizations think of it.

“In the wake of the Moody’s downgrades, the banks reputational risks has suffered,” says Mr. Sohn. “For financial institutions reputation is very important.”

Many analysts had been worried that Moody’s would lower the debt of Morgan Stanley by three levels. Morgan Stanley’s executives had argued that the firm had strengthened its finances and should not get that steep a cut. Moody’s, in lowering Morgan Stanley’s debt by two notches, noted that the financial firm was helped by the deep pockets of one of its investors, the Mitsubishi UFJ Financial Group, and the belief that Morgan Stanley would be deemed too big to fail and thus get the support of the US government, if it were in danger of defaulting on its debt.

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