Breakingviews-New Morgan Stanley woe is a drama lacking a crisis

Mon Oct 3, 2011 8:58am BST

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By Antony Currie

NEW YORK Oct 3 (Reuters Breakingviews) - The Wall Street firm was facing skepticism about its turnaround even before the third quarter turned crummy. Its latest misery, though, is driven not by substance but by numerical confusion. It should pass –- unless the fear driving the herd mentality turns into outright panic.

Full view will be published shortly.

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CONTEXT NEWS

-- Morgan Stanley’s stock price fell by 10.5 percent on Friday, almost doubled the 5.3 percent drop suffered by Goldman Sachs. Deutsche Bank’s shares ended the day 9 percent and UBS’s 8.7 percent lower.

-- The cost of insuring $10 million of Morgan Stanley’s bonds Friday at $449,000, roughly triple the cost in June but still way below what it cost in the 2008 credit crisis.

-- Reuters: Morgan Stanley falls hard on concerns about Europe [ID:nS1E78T0RP]

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

-- For previous columns by the author, Reuters customers can click on [CURRIE/]

(Editing by Rob Cox and David Evans)

((antony.currie@thomsonreuters.com)) Keywords: BREAKINGVIEWS MORGANSTANLEY/

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Antony Currie

NEW YORK, Oct 3 (Reuters Breakingviews) - Morgan Stanley’s (MS.N) October woes feel like a drama lacking a crisis. The Wall Street firm, which three years ago suffered a bank run, was already facing skepticism about its turnaround before the third quarter turned crummy. But that’s not behind its latest misery. Morgan Stanley’s stock tanked more than 10 percent on Friday after the cost of insuring its debt against default rose as investors again got the jitters about the investment bank’s exposure to Europe. But substance to the worries looks thin.

A blog post on Zero Hedge two weeks ago snowballed into the recent rumblings. It asserted that Morgan Stanley had $39 billion of French bank risk on its balance sheet -– more than half its book value. But these numbers dated to 2010. The bank run by James Gorman has almost halved that figure. What’s more, the blog picked only the gross exposure, which includes client assets, and those of the bank, held at French institutions. It ignores cash, hedges and collateral. Factor those in, according to a person familiar with the numbers, and the net exposure is zilch.

Of course, 2008 taught investors not to take banks at their word about exposures -- or the quality of their hedges. Morgan Stanley itself had a near-$10 billion loss in 2007 from disastrously hedging an otherwise-smart mortgage bet.

So investors are skittish. But even after its recent rout, Morgan Stanley shares are hardly out of whack with rivals. Like Citigroup (C.N), it trades just below half of book value, but far better than Bank of America’s (BAC.N) 30 percent of assets minus liabilities. Even JPMorgan (JPM.N) and Goldman Sachs (GS.N), which navigated the last crisis deftly, are barely trading above two-thirds of book. Under pressure to show its turnaround in fixed-income trading and wealth management is working, Morgan Stanley ought to trade at a discount anyway.

That doesn’t mean Gorman should hold his breath and wish for the latest ruckus to pass. Providing more information on the how the firm hedges its exposures, and who with, would help –- and he’s likely to do that when announcing earnings later this month. Of course, as the autumn of 2008 taught investors, once a panic over funding and capital hits a bank, all bets are off. Gorman may need to get out even further in front of this one.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Get Breakingviews alerts directly to your inbox three times a day. To sign up click here: www.breakingviews.com/TOPNewsSubscription

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CONTEXT NEWS

-- Morgan Stanley’s stock price fell by 10.5 percent on Friday, almost doubled the 5.3 percent drop suffered by Goldman Sachs. Deutsche Bank’s shares ended the day 9 percent and UBS’s 8.7 percent lower.

-- The cost of insuring $10 million of Morgan Stanley’s bonds Friday at $449,000, roughly triple the cost in June but still way below what it cost in the 2008 credit crisis.

-- Reuters: Morgan Stanley falls hard on concerns about Europe [ID:nS1E78T0RP]

RELATED COLUMNS

Don’t look down [ID:nL5E7KT3L9]

FICCser upper [ID:nN1E76K0DN]

-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [CURRIE/]

(Editing by Rob Cox and David Evans)

((antony.currie@thomsonreuters.com)) Keywords: BREAKINGVIEWS MORGANSTANLEY/

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