Asset Managers and Brokers Graded on SIV Exposure

The brokers and asset managers Citigroup (C) covers manage a whopping $1.2-trillion in money market assets. Analyst Prashant Bhatia estimates that these firms have $25-billion in exposure to structured investment vehicles (SIV).

At an estimated $8.5-billion, Morgan Stanley (MS) leads the way and is given a grade of B. It is followed by Legg Mason Inc. (LM)[C] and Charles Schwab Corp. (SCHW)[A], both with exposure pegged at $4.5-billion.

BlackRock Inc. (BLK)[A], which Mr. Bhatia considers the best-positioned asset manager, has an estimated $3.9-billion in SIV exposure.

Federated Investors Inc. (FII)[A] has $3.4-billion, Lehman Brothers Holdings Inc. (LEH) [A] is at $500-million and Goldman Sachs Group Inc. (GS) [A] has virtually none, the analyst said in a report.

The report cards are based on both relative SIV exposure and the quality of the SIVs owned.

“We also heavily weighted our grades to take into account the probability of equity shareholders having to support money funds via capital injection/asset purchases,” Mr. Bhatia said, adding that A grades imply no earnings impact.

In a bear scenario however, Morgan Stanley could see a negative one-time earnings impact of less than $50-million, while Legg Mason could take a $120-million hit, he added.

The analyst said the likelihood of a negative earning impact remains low, but Morgan Stanley was estimated to have $800-million of exposure to SIVs in default and Lehman had $2.6-billion of exposure to SIVs and ABCP conduits in default.

Since most of the short-term and easier-to-sell assets will likely be gone in the next month or two, the pressure to sell longer-dated assets at losses due to a lack of liquidity could rise, Mr. Bhatia said. However, if a “Super-SIV” structure is formed, it could ease some liquidity issues for higher-quality assets.

In terms of where this SIV exposure is heading, Mr. Bhatia noted that the $25-billion figure is down from $45-billion five months ago, and is expected to decline to $20-billion by the end of 2007.