Goldman, Merrill are ‘junk’, say own traders

The Economic Times reports:

Goldman Sachs Group, Merrill Lynch and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.

Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody’s Investors Service. For Goldman, Morgan Stanley and Merrill Lynch, that’s five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.

Traders of credit derivatives are more alarmed than stock and bond investors that a slowdown in housing and the global equity market rout have hurt the firms. Merrill since 2005 has financed two mortgage lenders that subsequently failed and purchased a third, First Franklin Financial, for $1.3 billion.

“These guys have made a lot of money securitising mortgages over the years in a mortgage boom time,” said Richard Hofmann, an analyst at bond research firm CreditSights in New York. “The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they’re not able to keep that securitisation machine humming along.”

The fall out from the housing bubble continues.Don't be surprised if Moody's downgrades the debt of some of these brokerage houses in the next 4 months.It's been lucrative making money off people who can't afford 20% down.