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Morgan Stanley's failure and secret bail-out - a scenario -- MS

|Includes: Morgan Stanley (MS)

The cost of insuring against a default by Morgan Stanley has risen by about a third in the last two weeks. MS's risks are that it has a large Euro exposure (banks and sovereign debt) and that it funds through wholesale borrowings rather than deposits.
 
MS's funding situation may make  it vulnerable to a run if the Euro crisis continues. As with Lehman and Bear, the loss of faith by big investors can quickly bring an investment bank down. Experts are saying all this is silly, since MS is in better shape than the French banks whose paper it holds.  But bank runs aren't rational.
 
MS is technically a bank, which would give it access to borrowing from the Fed.  The question is how the public will react to a behind-the-scenes Fed bail-out of yet another Wall Street bank and one that's dabbled in foreign bond speculation. I would expect howls of protest from the House of Representatives and political push-back on the Fed even if MS is in the "too big to fail club.".
 
If MS doesn't get funded and fails, the 2008 financial crisis could come back to the US via the Euro. With big bets placed on MS default contracts and big bonus money to be made, there will be plenty of traders hoping to push MS (and the US) over the edge once again.
 
Just a scenario to think about on a rainy night..  
 
Just my opinion.
 
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Morgan Stanley Seen as Risky as Italian Banks
http://www.bloomberg.com/news/2011-09-30/morgan-stanley-seen-as-risky-as-italian-banks-in-swaps-market.html