Morgan Stanley Appears a Little Too Desperate for Cash

There appears to be additional problems for the street's riskiest bank. I received this from a reader:

I have money tied up (frozen) in the primary fund.  I have been checking the daily position of the fund each day to make sure the investments in that fund are maturing and are turning back to cash.  Up and until today, every maturing investment was paid off.  However, a 1.3 billion repurchase agreement owed to the fund by Morgan Stanley (MS) was not paid back, it was rolled over to 10-8 from 10-3 and the coupon rate went to 5.5 from 1.45.  Any thoughts?

By the way, the reserve primary fund website to check these facts is www.reservefunds.com.

See the holdings statement which refer to this occurance here. The Reserve Fund's latest notice can be found on the site as well. Morgan Stanley's share price was severely punished Tuesday when the rumor spread that its Japanese funding source may pull out. Although the government gave the okay, over 25% will be bought by Mitsubushi bank over 25% underwater.  I find it hard to believe that the Asians are not tire of losing money in Wall Street investments. Think about it, would you be willing to invest at $25 per share with a market price of  $17 and change, a short ban about to be lifted, and a stock whose volatility and cost of capital is going through the roof. We can only assume they haven't spoke to the other Asian investors whose investment is deep sea diving right now. I welcome any and all comments from those that may have insight into the Morgan Stanley situation. 

Bloomberg: Morgan Stanley, Mitsubishi UFJ Say Deal Going Ahead (Update2) Oct. 7

The Fed and other "key global regulators'' have approved the agreement by Japan's largest bank last week to buy $3 billion of Morgan Stanley's common stock at $25.25 apiece and $6 billion of convertible preferred stock, Morgan Stanley said in a statement. The shares have closed below $25.25 every day since the agreement was reached.

"There's a rumor Mitsubishi may pull out,'' Fred Froewiss, vice president of institutional sales at RF Lafferty & Co. in New York, said earlier today. "Maybe they're getting cold feet because of the freeze in the credit markets. The market is really trading on whispers and fear.''

Morgan Stanley dropped $5.85, or 25 percent, to $17.65 in New York Stock Exchange composite trading after falling as low as $14.13 earlier in the day.

Comments

[helplessobs...:]

Who in their right mind wants to own a balance sheet that is leveraged 30 to 40 to one and holding leveraged buy out loans that are in danger of default which are hedged by unreliable counterparties? Who ever authorized the leverage increase for investment banks killed the goose and the rest of us.

2008 Oct 08 10:41 AM

[JohnKing:]

Paulson throws MS under the bus. The only reason Japanese wanted in was a piece of the bailout.

The Japanese are also sensitive to CEO Macks "issues" with the SEC.

bye bye Morgan Stanley.

2008 Oct 08 04:46 PM

[po'd in Plano:]

If you know anything about REPO, you would not be shocked. Seriously, please do a little more research. Maybe pull up a Bloomberg screen to see where overnight or weekly repo is being quoted, then chart it for the last 14 business days. Lending markets are TIGHT.

MS leverage ratio is scheduled to come down, and their balance sheet is down to $900 billion from $ 987 billion at 8/31. MS leverage ratio, pro-forma after the Mitsu-UFJ deal, is expected to dip near 20.

2008 Oct 08 08:20 PM

[po'd in Plano:]

more detail on the Repo arrangement...direct from the pro-sup on the Reserve funds website:

Repurchase Agreements. Each of the Funds may invest in repurchase agreements but will limit them to those banks and securities dealers who are deemed creditworthy
pursuant to guidelines adopted by the Trustees. The U.S. Treasury Fund will further limit its investment in repurchase agreements to 5% of its total net assets, except for temporary or emergency purposes, and to those whose underlying obligations are backed by the full faith and credit of the United States. Securities subject to repurchase agreements will be segregated and will be monitored to ensure that the
market value of the securities plus any accrued interest will at least equal the repurchase price.

2008 Oct 08 08:43 PM

[Reggie Midd...:]

P'OD: I don't get it. What research did you want me to do? If you have some light to shed on this, please do. The Reserve fund is the fund that broke the buck, remember? They are alledgedly the ones that found the money market fund, and literally locked up their customer's money when they took a huge loss due to exposure to Lehman Brother's short term debt. They are trying desperately to revert to pure cash so as to return funds to their clients and are in litigation. It would be nonsensical for them to roll over debt when in emergency liquidation mode, and even if they weren't in such a mode, Morgan Stanley wouldn't be the firm to do it with. It appears as if MS couldn't cough up the cash, but we don't know for sure do we, which is why I put this query out to the public.

I would also suggest you do some additional research. You cannot fully calculate MSs leverage without taking into account their VIE's whose economic risk is more than negligible, as well as those financial instruments which lend significant implicit leverage but whose leverage is note explicitly exposed on the balance sheet. Much of this info is opaque and not available. It appears as if you are repeating what you heard in the media without doing your own independent research. May I suggest my blog:

The Riskiest Bank on the Street
boombustblog.com/conte.../

The Riskiest Bank on the Street, Update
boombustblog.com/conte.../

MS Q1 review
boombustblog.com/index...

What Morgan and Lehman had in common, Shenanigans know as hide the sausage
boombustblog.com/conte.../

A perusal of the site will reveal more. Notice that much of the research was performed many months ago, before the market was aware of MSs and Leh's problems. Thus the trades were highly profitable. The reason, I performed my own extensive research with independent verification. Research, indeed....

2008 Oct 08 11:43 PM

[Timmothy Posey:]

Obviously you have a thing out for MS. However, if you read their latest financial statements (and assuming it is correct), they have about $171 billion in cash-like assets, then add on the $9 billion they will get from the Japanese. That leaves them with $180 billion, more than enough to cover all of their Level 3 assets, senior unsecured debt, preferred securities, and liquidity 6 months into the future.

2008 Oct 09 12:22 AM

[Reggie Midd...:]

I have nothing out for MS at all (they were my blog's first corporate subscribers). I was, and am, short and bearish on MS for nearly a year, thus I just state the facts as my independent research bears them out - something that is hard to come by these days. Do a search on my blog for GGP and you will see a similar and very interesting story coming to its final conclusion.

Define "cash-like" assets. Is that like the reserve fund money market product that was just frozen and is the subject of this article? Or is it like the alleged "liquid assets" that JP Morgan held in custody for Lehman right before they froze those actually illiquid assets and sent Lehman into bankruptcy over the weekend (I sure hope Morgan doesn't clear through JP Morgan!).

"That leaves them with $180 billion, more than enough to cover all of their Level 3 assets, senior unsecured debt, preferred securities, and liquidity 6 months into the future."

How do you know that when so much is stuffed away in unconsolidated VIEs, consolidated but opaque VIEs, and other SPEs?

Do you have an insider track to MSs off balance sheet activities that I may have overlooked?

Come on over to the BoomBust where we go through these companies' numbers with a fine tooth comb that features a built-in radio microscope :-)

2008 Oct 09 08:21 AM

[sieraromero:]

What about C being more than a little desperate to. That is why the government was trying to get C to take over Wachovias assets and have the taxpayers pick up the tab. The government is now in the business of who comes out ahead on this and who doesn"t. We will have 1 more leg down on the general market and then by Wednesday at the latest we will get a big intermediate leg up, before continuing on the current downtrend to bring the market down to some realistic levels!

2008 Oct 09 08:58 AM

[po'd in Plano:]

My comment was specific to the Repo transaction with the Reserve Fund. Based on what I know about repo markets, it appeared the Reserrve Fund invested cash into a collateralized REPO with Morgan Stanley. nothing more than that.

I do agree MS has it's problems, and remains to be seen what will happen to them. I just happen to think they aren't the only one facing restricted credit and reduced short-term funding alternatives.

2008 Oct 09 09:03 PM