By AARON LUCCHETTI, ROBIN SIDEL and JEANNETTE NEUMANN

Moody's Investors Service cut Morgan Stanley's long-term debt rating by two notches, in a move that stands to raise expenses at the securities firm but spares the company from the deeper downgrade that many on Wall Street had feared.
The move came as the rating company downgraded more than a dozen global banks, including the five largest U.S. banks with global trading arms, to reflect declining profitability in an industry that is being rocked by soft economic growth, tougher regulations and nervous investors.
The Moody's Corp. unit reduced Morgan Stanley's rating to Baa1, which is three notches above the junk, or noninvestment grade, status that many bond buyers avoid. The move stands to add to the company's borrowing costs and force it to present billions of dollars in cash or high-grade bonds as collateral.
More important, the downgrade could trim Morgan Stanley's earnings power by cutting market share in high-margin businesses such as derivatives as traders seek out higher-rated trading partners. Questions about major banks' earnings power and capacity to withstand market shocks have weighed on financial stocks since early 2011.
Morgan Stanley's shares fell 24 cents, or 1.7%, to $13.96 in 4 p.m. New York Stock Exchange composite trading on Thursday during a broad market selloff. In after-hours trading, the stock was up 3.6%.
In a statement, the company said, "While Moody's revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years."
Over time, a downgrade could mean "the incremental new business could be tougher to win," said Glenn Schorr, an analyst at Nomura Securities. The company's shares have fallen 39% over the past year amid questions about its profit outlook.
But the two-notch rating cut saves Morgan Stanley from a blow to its reputation. The company that has labored since the financial crisis to dispel investor fears that it would be the first major financial firm to be rocked in any large market storm.
On Thursday, Moody's cut Morgan Stanley's long-term rating by two notches and reduced long-term ratings by two levels at Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Citigroup Inc.
Bank of America Corp.'s long-term debt was downgraded by one notch. Ratings at Wells Fargo & Co., which has a smaller investment-banking operation, weren't reviewed.
Investors have been questioning how Morgan Stanley would fare since February, when Moody's said it would review the long-term ratings of 17 major banks around the world. The review focused on the sector's weakening profit outlook, but attention was immediately drawn to Morgan Stanley as the smallest company and the one whose ratings stood to take the largest hit. Other big U.S. firms faced downgrades of two notches at most.
The downgrade comes nearly four years after the New York company was forced to seek outside investors and take refuge in Federal Reserve bank-holding-company status at the height of the 2008 financial crisis. Since then, Morgan Stanley has focused on selling risky business lines and overhauling management.
Because those moves have reduced risk and left the company with abundant cash on hand, Chief Executive James Gorman recently dismissed a possible three-notch downgrade as "a somewhat stunning outcome."
It is the first time that Moody's has imposed a sweeping downgrade of banks since 2007. The downgrades target banks with big trading operations but not necessarily those that deal directly with consumers.
The downgrades could add to the unease plaguing global markets. Many investors have been skeptical of banks' capacity to withstand an economic downturn or market shock tied to the European debt crisis. Worries about those outcomes have increased in recent weeks amid signs that Greece may exit the euro zone and that economic growth is slowing in the U.S. and China.
Standard & Poor's Ratings Services, a division of McGraw-Hill Cos., last year downgraded more than a dozen global banks, including the six biggest U.S. firms, in a change aimed at sharpening the focus on how banks would hold up under market and economic stress, and on the likelihood of governments providing extraordinary support to troubled institutions. But this week's downgrades mean that Moody's has the lowest rating for the five biggest U.S. banks among the three major credit-rating firms, which also include the Fitch Ratings unit of Fimalac SA and Hearst Corp.
The banks have spent the past couple of months downplaying the potential impact of a downgrade. They have said they are more robustly capitalized and have more cash on hand than they did in the financial crisis of 2008.
Policy makers also have moved to minimize any funding-market impact. A liquidity program announced last week by the Bank of England was in part an effort to make sure U.K. banks would continue to have access to funding.
Write to Aaron Lucchetti at [email protected], Robin Sidel at [email protected] and Jeannette Neumann at [email protected]