Standard & Poor’s has revised the rating outlooks on a trio of premier securities firms — Morgan Stanley Dean Witter & Co., Goldman Sachs Group Inc., and Merrill Lynch & Co. Inc. — to negative from stable

In a new report, Standard & Poor’s says that the risk profile of the securities industry is deteriorating as the business evolves. “The world has changed for institutional investment banks,” it says. “No longer can they always expect to merely pitch their underwriting prowess and advisory expertise to win attractive fees from their corporate clients. Increasingly, they are under pressure to participate in some less attractively priced products, like senior bank loans and even CP backup lines to earn the right to play in their traditional intermediation markets.”

S&P says this situation developed when large corporate banks, notably J.P. Morgan Chase & Co. and Salomon Smith Barney Inc., changed the playing field. “It is not just their recently achieved level of expertise that is the relevant issue; it is also their willingness to use their own, or rather their affiliated banks’, balance sheet. In so doing, they put their capital at risk,” it says. “The changes come while the industry’s most lucrative businesses, merger and acquisition transactions and equity underwriting, are down sharply in 2001. The longer this slump continues, the greater the pressure on institutional securities firms to extend credit to maintain overall business activity.”

Salomon Smith Barney, J.P. Morgan Chase and Bank of America Corp. have been offering their balance sheets most aggressively, it says, “pushing clients toward the notion that they should go for the bank willing and able to provide the complete range of services”. “With less credit being provided by commercial banks, large corporations and institutions are turning to the securities industry to fill the void. The fact that individual securities firms are willing to step up to the plate suggests a shift in the balance of power from the brokers to their clients, assuming they are of sufficient creditworthiness. Firms below investment grade still face a credit crunch.”

S&P says it is not worried about the magnitude of credit exposure necessarily, “The issue is that they represent large single-exposure concentrations that in some cases would have exceeded the legal lending limit had the broker been a commercial bank. For a lending institution, the only real safety, other than good credit risk management, is diversification, not only within the loan portfolio but also across various products.”