The Last Days of Morgan Stanley

If Morgan Stanley (MS) was in distress back in mid-September, it's much worse today, trading as low as $12.50 a share: that's just 40% of its stated book value. For all the denials coming out of the bank, clearly the market is very skeptical that the injection of cash from Mitsubishi UFJ Financial Group is going to happen -- or that even if it does happen, it will be sufficient to stave off insolvency. After all, even $85 billion wasn't enough for AIG, and MUFG is putting much less than that into Morgan Stanley, which has a similarly-sized balance sheet to AIG.

It looks like we're getting close to one of the market's vicious syllogisms here: Without the market's trust, Morgan Stanley is nothing. The market doesn't trust Morgan Stanley. Therefore, Morgan Stanley is, well, toast.

My guess is that at some point over the weekend, Hank Paulson will announce that he's using his new authorities under the TARP to effectively nationalize Morgan Stanley, following Gordon Brown's lead in the UK. And Morgan Stanley will only be the first of many banks to suffer such a fate.

Disclosure: I am long MS, thanks to the index funds in my retirement account.

Comments

[zermux:]

Your article is irresponsible.

2008 Oct 09 12:31 PM

[Timmothy Posey:]

I was actually hoping TARP give it some money in exchange for preferred shares. Remember, if Merrill Lynch wasn't allowed to fail, I don't think Morgan Stanley or Goldman Sachs would be as well. We are seeing the fallout of LEH hitting the market with AIG.

And now as a retail bank, MS has better access to the discount window and just about everything else the Fed has available. John Mack is a very smart guy, and I wouldn't be surprised that he wouldn't be able to pull a rabbit out of his hat on this one.

Disclosure: Long MS Senior Unsecured Debt

2008 Oct 09 12:33 PM

[bobomite:]

Wow listen to the day traders gettin' all uppity when a bank nationalization is discussed.

Don't hear that kind of "that is irresponsible" tone when other, non-bank company futures are discussed on this blog.

Let the banks fail, next banks will remember what a 9-1 reserve ratio is.

2008 Oct 09 12:49 PM

[FromHK:]

Having dealt with Japanese for significant amount of time, one thing for certain is that they take a long time to make decisions, but they are unlikely to go back on their word easily, if ever. It is more than a face issue, but more a honor issue--sadly not many Americans can say the same nowadays. With the agreement in place and UFJ's official reaffirmation yesterday, I doubt that the money is not coming in. Btw, with Yen up something like 5% in the past week, they are getting 5% discount to their original agreement already! Also, MS' balance is the same size as AIG? Need to check your facts.

2008 Oct 09 12:55 PM

[triznix:]

John Mack is so smart that he got MS into this mess in the first place! Being smart is great but if your arrogance overwhelms it then it's useless. Merrill Lynch would have failed if it wasn't bought out. That could happen to Morgan as well.... maybe they merge with Golden Slacks? I can say for sure the feds will NEVER allow The Goldmen to fail. True, MS is officially a bank now, but they have yet to get people to move their deposits over. Would YOU like to open a deposit account there?

2008 Oct 09 01:03 PM

[The World's...:]

Agreed bobomite.

2008 Oct 09 01:05 PM

[Tom in DC:]

To the person who questioned the size of MS's balance sheet.
finance.google.com/fin...
MS Balance Sheet Assets = $1.03 Trillion
finance.google.com/fin...
AIG Balance Sheet Assets = $1.05 Trillion

So you are right, MS balance sheet is a mere 98% as big as AIG.

2008 Oct 09 01:08 PM

[turkeyeyes:]

The shorts have come back to finish off what's left of the market, thanks to ball-less Cox and the SEC idiots.

2008 Oct 09 01:13 PM

[triznix:]

MS is still on the banned short list. This is pure selling... no shorts involved

2008 Oct 09 01:18 PM

[Brill:]

If Morgan Stanley is nationalized, I don't think there will be a bank left standing independently within 1 year. The FED will own everything. Even JP Morgan will go under.

2008 Oct 09 01:26 PM

[JohnKing:]

MS is a failed business model trying to re-engineer into a commercial bank, thats incredibly shady on the face of it.

What if KFC decided to go into roast beef sandwiches after failing at the chicken game, would you invest? The bigger question is will Paulson invest, he won't.

bye bye Morgan Stanley, all thats left is a cameo for Mack in front of Congress.

The End.

2008 Oct 09 01:26 PM

[turkeyeyes:]

triznix get with the game, man. the short sell ban expired!

2008 Oct 09 01:56 PM

[phat cat:]

To Tom in DC. When you look at a balance sheet, on the asset side, there's current asset (which means cash or cash equivalent) and long term asset. If you compare MS and AIG, which I think you should, you will see what the differences are.

My point above is that the Fed and Treasury can't allow another bank failure or their entire effort will be wasted. Also, I believe the Japanese will be good on their word--let's call it an oriental thing that they actually still abide by their word!!! So if you are selling/shorting the stock because you believe the money is not in, then I think it's very very risky. The company is trading at less than 1/2 of its book value which was verified by UFJ (their conversion price for the preferred is at 32 if I remember correctly, and that due dilligence was done 2 weeks ago). So I'd think twice before putting on shorts now.

2008 Oct 09 02:26 PM

[peppuzz:]

pls short MS, short it and you will have your fingers burnt...why? because you need to read a financial statement before talking...go the MS website and find it out....and do not forget the Chinese Govt is involved too through CIC...struct credit asset/tier 1 ratio of MER, LEH , Citi were/are some 160%, whereas MS is 65% (JPM 60%, the lowest), with $175bn in cash (LEH had 42bn)...at least read what the numbers are,otherwise it could be painful, very painful: some short could have a nasty outcome too, e.g. Volkswagen in Europe=> someone is still bleeding from the as¢çss....goood luck and, pls, short it that we need to clean this market up-best, peppuzz

2008 Oct 09 06:13 PM

[Vikram Saxena:]

The issue of trust became a non-issue once MS became a commercial bank. Sure they will have to de-leverage even more they are no dependent on the market's trust to finance themselves. There next debt offering is not due for 7-8 months. In the short-term they can always sell 3 month commercial paper to the Fed if they need cash.

MUFJ also bought out the 25th largest bank in the US. They want to remain in good terms with the Feds. It is highly unlikely they will dump MS now. They know they will lose the other deal if they turn out to be an unreliable partner. Also they can not get a bigger stake in MS since anything greater than 25% will trigger foreign ownership rules essentially restarting the process. So MUFJ has too much at stake to run away but very little room to negotiate a better deal.

And at the end of it all, Paulson will severely regret the day he made the political decision to let Lehman go under. That stupid political statement started the slide and the House of Representative's decision to vote against the rescue plan, added the push to destroy confidence in the world's financial system.

2008 Oct 09 09:06 PM

[prescient11:]

Delete my comment why don't you, you piece of garbage.

2008 Oct 09 10:18 PM

[ruhroh:]

Moody's places Morgan Stanley's A1 rating on watch for downgrade. So now Mack gets to whine about short sellers and rating agencies. Good purchase by MUFJ @ $25 when the stock is now trading at $12.50 before the investment is even closed.

2008 Oct 10 12:21 AM

[ruhroh:]

Keep in mind Moody's playing a bit of catchup/cya given that its debt clearly trading at distressed levels...today 5 yr cds ~$25 pts up front and 2 yr maturities trading $65-70 range

2008 Oct 10 12:28 AM

[Owen:]

MS is now trading at under $8, well below book value. Even more interestingly, the Jan-2010 7.5-Put options are trading above $5: people are willing to pay $5 for the right to sell MS at $7.50, translating to a market sentiment of about 65% that the stock will become worthless.

2008 Oct 10 02:50 PM

[pcyhuang:]

MS -- Another Victim of Naked Shorting?

siliconinvestor.advfn....

Cheers,

2008 Oct 10 11:52 PM

[pcyhuang:]

MS -- Victim of Abusive, Naked Shorting? (Updated)

siliconinvestor.advfn....

Cheers,

2008 Oct 11 12:04 AM

[Rick Prab:]

Reuters reports that CDS insurance rate for MS has risen to 2400 basis points plus 500 basis points per year!!

If you hold MS bond that is maturing in next 5 years you can take insurance paying 30% of the bond value now!! Or you can also sell the bond to 50 cents per dollar!!! Imagine what would have happen if Mitsubishi does not bail this out.

I have strong reasons to feel that Mitsubishi won't bail out. If we read the press statement of Mitsubishi, -- there is disclaimer that they may still walkout.
Japanese market too is down and Mitsubishi on Sep 22 did not want another blowup after loosing money on Lehman. By trying to prop up MS Mitsubishi was trying to save its investments in MS paper.
As the things stand now. if Mitsubishi invests in MS it will lose 80% of its money and if they buy insurance against MS they will have to spend 30% as the first payment and 5% every year for next five years.
If I were Mitsubishi, I would walk away from the deal after taking insurance and then letting MS fail to recover money from Insurance!!. Till the time I buy insurance, I would keep assuring everyone that I would stand by the deal to bring 9 billion USD to MS ( they do not talk about percentage stake they want in return ) and delay the deal as much to cover my loss.

2008 Oct 11 01:50 PM

[Kunst:]

zermux, your comment is stupid.

2008 Oct 11 06:27 PM

[marvinthema...:]

Your guess? This is a very irresponsible "guess".

2008 Oct 13 11:25 AM

[tojm:]

Felix Salmon is not worth reading. He's always spewing his worthless opinions, and being wrong as often as right.

2008 Oct 14 12:13 AM

[Victoria:]

Dear Felix,

Don't you realize that these kind of rumors can create fear and panic?

2008 Oct 15 04:05 PM