Editor's letter

Record profits in structured equity have propped up the poor results of many investment banks in the third quarter, but while you consider the stabilising influence this has had, at the same time you have to ask yourself how long can this go on?

The answer is complicated, although predictions can be reduced to one simple question. Is the bank issuer rated at least single A by the credit rating agencies? This is often the first question for distributors and valuation companies when they review a new structured product. If the bank issuer is rated at or higher than single A, then the distributor will move on to review the more technical nature of the offering.

Most banks that issue structured products are AA-rated, so asking the question is a fairly academic exercise.

We all know that the rating agencies follow rather than lead, so what will they make of the carnage in the credit markets of the last month? And if they do decide to act, will they downgrade banks that provide structured products to distributors?

On the face of it, the agencies should take some comfort from a stream of relatively encouraging third-quarter results from investment banks. They certainly should be happy to see that Lehman's numbers were bolstered by market volatility that helped its equity derivatives business to declare record results. Morgan Stanley also boasted record results from derivatives. And Bear Stearns' institutional equities net revenues were a record $719 million, driven in large part by record results in structured equity products.

Bear was presented with an A+ (negative) rating by Standard & Poor's on August 3. The bank is a regular issuer of structured products, but take a look at its rating and then consider the effect that the credit crisis may have had over the last two months. Will Bear maintain its credit rating?

The answer is probably yes, for the meantime. But any trip-up that jeopardises its single A rating could well see distributors shy away from structured products issued in its name. For a bank recording profits from structured products that have helped support poorer results in other areas of its business, it must be a worry.