Tough Times Could Get Tougher For Troubled Brokerage Industry

Six major Wall Street firms were warned last week that their credit ratings could be downgraded, a sweeping sign that the severe slump in the securities industry is not expected to end soon.

Standard & Poor’s, a major ratings agency, said its unusually broad assessment was prompted by persistent turbulence in key financial markets and a downturn in trading and underwriting securities, factors that steadily hammered profits this past year.

“This reflects the general belief … that the outlook for the industry over the balance of 1995 and into 1996 is far from certain,” said Perrin Long, a securities industry analyst with Brown Brothers Harriman & Co.

The firms cited by S&P are Bear Stearns Cos. Inc.; CS First Boston Group Inc.; Goldman Sachs Group LP; Morgan Stanley Group Inc.; PaineWebber Group; and Salomon Inc.

Standard & Poor’s Ratings Group said individual companies could be downgraded if profits worsen or further market turbulence increases risks of trading losses.

“Until we have a more stable market environment, we don’t feel comforted by what we see out there now,” S&P analyst Jake Newman said in a telephone conference with analysts and reporters.

A downgrade would mean further hardship. If a firm’s financial outlook is deemed riskier, investors in its debt typically demand higher interest rates. This raises short-term borrowing costs for Wall Street firms already smarting from the rise in interest rates.

Wall Street firms typically sell billions of dollars of their own securities as a way to raise money to back purchases in financial markets.

Two weeks ago, Moody’s Investors Service, another major credit-rating agency, downgraded Lehman Brothers Inc.’s debt.

The glum outlook from Standard & Poor’s comes despite thousands of layoffs by Wall Street firms to cut costs in the past six months and a surprising rally in bond and stock markets in this year’s first quarter.

Conspicuously absent from the S&P list were Merrill Lynch & Co., Smith Barney Inc. and Dean Witter Reynolds Inc. - all firms with large operations that cater to individual investors and have continued to flourish despite the overall downturn.

The rest of the firms on the S&P list mainly have large trading and investment banking businesses that got hit particularly hard by the slump.