They Just Don't Get Morgan Stanley!

The bank and its defenders, in turn, are claiming that Moody's has a blinkered perspective, but that carping won't do much good.

Fact is: Even if Morgan Stanley apologists claim not to give a damn about the firm's bad reputation, it will have an impact. The effects will obviously be psychological, tarnishing the bank's image in the eyes of customers and employees. It will also hit Morgan Stanley in the moneymaker, potentially increasing its borrowing and collateral by about $7 billion.

But that's where it gets interesting.

Every big nasty turn in business has unintended consequences, turns in the course-of-business that are hard to imagine. Failing to imagine particular consequences sets traders up for disappointment. Good traders are good anticipators. Unfortunately, the media did not help them along.

In an article titled "Morgan Stanley Spared a Sharper Cut," The Wall Street Journal suffers a failure of imagination. They don't even mention the $7 billion figure. Worse, they only mention other possible consequences in vague terms, noting that 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."

The Financial Times points out that the mere threat of downgrade has put this phenomena in motion, "helping to reshape a vast market that some politicians have accused of playing a key role in the crisis."

They rightfully add that "another area with potential knock-on effects is the U.S. municipal bond market where states, local governments and other such bodies raise money."

Interest rates on this debt might rise, they said, further imperiling municipalities, which are already severely troubled.

Citigroup(C) , Bank of America(BAC) and JP Morgan(JPM) were downgraded too. This is not good. But to get a bead on just how bad it will be requires a touch of foresight and imagination.