Three Big Wall Street Banks Are Downgraded by S&P

Standard & Poor's cut the ratings of three big Wall Street banks--Lehman Brothers, Merrill Lynch and Morgan Stanley--and said the outlook for large financial institutions in the United States is now mostly negative.

"The outlooks on the large financial institutions sector in the U.S. are now predominantly negative," the credit rating agency said in a statement.

Credit Crunch
Credit Crunch

Lehman , Merrill and Morgan Stanley all fell in reaction to the move. The news also pushed the stock market to its lows for the day.

"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 subprime mortgage related losses 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 and revised outlooks to negative on Bank of America 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.

That wasn't the only bad news to hit financials on Monday.

U.K. mortgage lender Bradford & Bingley was also downgraded by S&P and Fitch Ratings after it earlier announced a slide in profits and restructured a rescue plan.

Moreover, Wachovia, the No. 4 U.S. bank, ousted its chief executive in the wake of growing legal woes and loan losses. And Washington Mutual , the large bank and home lender slammed by the mortgage slump, said it would strip Chief Executive Kerry Killinger of his title of chairman starting next month.

"The worst of the credit market is over, but there are still a lot of problems," said T.J. Marta, fixed income strategist at RBC Capital Markets in New York.

The S&P action followed continued downgrades of the financial sector in recent months. In May,Citigroupslashed its earnings outlook for Wall Street investment banks, Goldman Sachs Group , Lehman Brothers and Morgan Stanley, citing a tough operating environment.

The second quarter has seen lower client-related trading volumes, little banking activity, losses related to ineffective hedging and reversals of gains on fair valuing liabilities, Citigroup analyst Prashant Bhatia wrote in a note dated May 16.