Morgan Stanley: US debt rating drop poses risk

NEW YORK— Standard & Poor's downgrade of U.S. debt could end up hurting Morgan Stanley's business should the lower debt rating further erode confidence in the financial markets and economy, the investment bank said in a regulatory filing on Monday.

The disclosure helped send shares in the New York lender tumbling 15 percent in late afternoon trading.

S&P lowered its rating on U.S. long-term debt by one notch on Friday — the first such downgrade in history. The rating agency said it lacks confidence that political leaders will take the steps needed to avert a long-term fiscal crisis.

The downgrade of long-term debt issued by the U.S. government affects the banking and lending industries because many interest rates are pegged to the yields on Treasury securities.

Morgan Stanley believes that the fallout from the U.S. debt downgrade could have a "material adverse effect" on the lender's business, finances and liquidity, according to the company's latest quarterly report filed with the Securities and Exchange Commission.

The New York bank said the downgrade could have a material, or significant, impact on financial markets and the global economy. That could lead to a disruption of payment systems, money markets, long-term or short-term fixed income markets, foreign exchange markets and commodities markets, among others.

Should that occur, that could jeopardize the cost and availability of funding, for example, the lender warned.

Morgan Stanley also cautioned that its own credit rating could be adversely affected, possibly requiring it to post additional collateral on loans backed by U.S. Treasury securities.

"Because of the unprecedented nature of negative credit rating actions with respect to U.S. government obligations, the ultimate impacts on global markets and our business, financial condition and liquidity are unpredictable and may not be immediately apparent," the lender said in the filing.

In addition, Morgan Stanley said that concerns over the debt crisis in Europe could have a material adverse effect on its business.

Specifically, the lender warned that a worsening financial crisis in Europe could further disrupt financial markets, resulting in volatile bond yields on European governments' debt.

As of June 30, the Morgan Stanley's net funded exposure, after hedging activity, in Greece, Ireland, Italy, Portugal and Spain was about $2 billion, the company said.

The lender also said it had about another $2 billion in exposure for overnight deposits at banks in those European countries and $1.5 billion in unfunded loans to corporations.

Morgan Stanley shares fell $3.04, or 15.2 percent, to $16.98 in afternoon trading on Monday.