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Sunday, October 02, 2011 7:44:33 AM
AutomaticEarth<>October 1 2011: How The European Rot Entered Wall Street
Detroit Publishing Co. Lower Manhattan 1904
"New York Stock Exchange, Wall and Broad Streets"
Ilargi: There were mass protests in Portugal today. The country has been largely left outside of the international media recently, but the people in Lisbon still hurt. Austerity raises electricity and gas prices at the same time that jobs are lost en masse.
No-one in southern Europe bats a surprised eye at this anymore. It's become a way of life. Both the new-found poverty and the rising protests. Or perhaps we should say: the rising spirit of protest. The first waves of it have passed this spring and summer, and have done nothing to stop the cuts.
Time for Protest 2.0. The more cuts there are, the more protests there will be. For now, the world is mesmerized by lofty notions of the Arab Spring, and how it was supposed to bring democracy to the backwaters of the planet.
1000’s of deaths later, there's precious little democracy, and countries like Portugal are set for the next wave of banners in the streets (along with who knows how many others along the Mediterranean and beyond). In Greece, protests already derail the IMF's assessment of the country's debt.
And now there's Wall Street. Greece sovereign debt is presently rumored to be up for a 75% cut in troika talks. Greek banks hold little else. French banks hold a lot of Greek debt, even own some of its banks. And -enter Wall Street stage left- Morgan Stanley owns a lot of French banks' assets and/or liabilities. Not least of all is in the shape of derivatives.
Hence, Morgan Stanley was down over 10% on Friday. If French banks go down because of their exposure to Greece, Morgan Stanley will go down too. And if Morgan Stanley goes, so does everyone on Wall Street who deals with it. Which is all of Wall Street.
It’s not like you can ringfence Greece, or its banks. There are way too many links between countries on the one side and their central and commercial banks on the other. And many more links between all other central and commercial banks on the planet. There's no way just one major bank will go down the abyss. Whoever's first will take down many others.
And so the vigilantes are licking their chops and waiting for Monday. Not as nervously, though, as all them market watchers all too eager to see the collapse. The vigilantes take too much pride and joy in picking them off one at a time. Pride and joy and profits.
Morgan Stanley is not a commercial bank. It dove 10.47%. Goldman Sachs isn't either. It lost 5.33%. BofA and Citi lost less, even though they're basket cases. It goes something like this: as per Aaron Lucchetti for the Wall Street Journal:
Morgan Stanley Takes Hits
The concern with Morgan Stanley stems from its small size relative to other global financial firms and its reliance on debt markets, rather than customer deposits, to fund its business.
Ilargi: Yeah, the most threatened banks on Wall Street are now those that don't have a direct grip on your cash. And/or are in bed with France's financial system. Which sleeps with Greece, which sleeps with Bulgaria and Albania and Romania. Oh, and French banks are way over their necks into Italy. Just so you know.
Funny how we haven't heard much about Wall Street banks and their risks lately, isn't it. Well, not to worry, what's happening to Morgan Stanley will make sure we’ll have them all back on our front pages soon.
In fact, Tim Geithner's trip to Europe recently is all about that: get Europe to cover Wall Street's losses and exposure to European banks. Europe's answer: you cover the losses, why should we?!
It looks pretty sure that Germany won’t play along. And it's hard to see from where I'm sitting how the intricacies are lined up exactly, but seeing as Morgan Stanley has $56 trillion in derivatives outstanding, much of which will of necessity be on European sovereign and bank debt, and knowing that JPMorgan and BofA have even larger derivatives portfolio‘s, that 10.47% Morgan Stanley loss on Friday looks like a harbinger of things to come.
No more Markets Mr. Nice Guy for Wall Street; the banks will be knocking on all those Fed windows again soon. And it’ll be interesting to see how Geihtner and Obama react. Feel lucky, punks? Care to risk your re-election? Or do you have your Wall Street funding lined up as we speak?
Methinks it might perhaps possibly be time for electronic pitchforks. If only just to lift our feet out of the morally depleted quicksand we haven't seemed able to get out of by any other means for all this time. For all we know it might feel liberating.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Morgan Stanley Takes Hits
by Aaron Lucchetti - Wall Street Journal
Concern Over European Exposure Produces Volatile Month
Shares of Morgan Stanley sank 10% on Friday as the New York company continued fending off rumors about its exposure to troubled debt in Europe. The slump ended a month of harrowing volatility for investors in Morgan Stanley. Of the six largest U.S. banks, Morgan Stanley shares moved the most on 10 trading days in September, twice as many as Citigroup Inc.
The concern with Morgan Stanley stems from its small size relative to other global financial firms and its reliance on debt markets, rather than customer deposits, to fund its business. As jitters about potential European debt defaults grow, investors are steering clear of bank stocks that might be dragged down as collateral damage if conditions in Europe worsen.
Morgan Stanley feels the concern more acutely because it is a big player in derivatives, risky opaque contracts that can often backfire on a bank if its risk management doesn't limit losses. The situation at Morgan could turn dire if customers or lenders become skittish enough to flee. Three years ago, Morgan survived during such a panic, when it was essentially propped up by the federal government and secured a $9 billion investment from Japanese bank Mitsubishi UFJ Financial Group.
Morgan Stanley has built up its cash hoard since then and raised more equity as a buffer against potential losses. It also has gotten out of many of the risky trading businesses that eat up capital and can force big, unpredictable losses.
But the firm still is a big player in derivatives. Recent data from the Office of the Comptroller of the Currency showed Morgan Stanley had derivatives contracts with a total notional value of $56 trillion at the end of June. While that number exaggerates the total amount at risk, Morgan's figures exceed the total notional amounts at Citigroup and Goldman Sachs Group Inc. J.P. Morgan Chase & Co. and Bank of America were still well ahead of Morgan Stanley, which had the third- largest total, according to the OCC.
One of Morgan's next challenges might be holding onto key staffers, especially if cost-cutting plans and sluggish markets eat into this year's bonuses. This past week, two senior Morgan Stanley stock trading executives in London, Michel Sindelar and Cyrille Walter, announced they were leaving for Bank of America to work for former Morgan Stanley trading executive Fabrizio Gallo, people familiar with the matter said. Stock trading has been one of Morgan's strong business units of late.
Last week, investors also started focusing on Morgan's exposure to French banks after a website published a report about Morgan's 2010 annual report, which noted $39 billion in gross exposure to French banks. People familiar with the firm's finances said the figure in the report was outdated and included money being held on behalf of clients. The firm's net exposure, which takes into account hedges, is about zero, they added.
But investors don't necessarily trust hedges as much as they used to. And if the hedges are with other weakened banks, the exposure might actually be greater than zero, critics allege. "There's nothing the company can do with its statements because everyone thinks the banks are doing things off balance sheet," says Richard Bove, a Rochdale Securities analyst that has a "buy" rating on Morgan Stanley shares.
Mr. Bove suggested that Morgan Stanley use some of its $182 billion in cash and go back and buy some of its debt, whose yields have been increasing in recent days as concern about the firm grew. Friday, the firm's credit default swaps, which act as insurance against a possible default, rose to $490,000 for $10 million in protection, up from $434,000 a week ago. The debt was more expensive to protect against than Bank of America, Société Générale and Italian bank Unicredit, according to data provider Markit.
Earlier in September, Morgan did buy back some debt, and the firm's chief executive, James Gorman, talked to followers of the stock like Mr. Bove to calm market fears about the company's finances. Morgan Stanley has also attempted to clarify that its derivatives position isn't a concern, when taken in the context of its overall business and when comparing it to other large banks.
Mr. Bove also suggested that the firm could use the 17,000 brokers in its joint venture with Citigroup to boost its deposits, something he says wouldn't be difficult in the current market environment. Investors like to see more money in deposits because it is viewed as more sticky than money from bond investors who might demand exorbitant rates in unstable markets.
Separately Friday, Morgan Stanley settled a civil antitrust case with the Justice Department for $4.8 million involving its work with two New York area power companies.
Le Spleen de Morgan Stanley
by Lisa Pollack - FT Alphaville
All is not well in the kingdom of Stanley. The CDS spreads have blown out and the market is concerned. Very, very concerned. Moody’s Analytics is here to tell us all about why that is.
The first [concern] is the exposure of MS to European institutions and the second is the level of trading revenues in the third quarter. MS reported in its second quarter earnings call that net exposure to the GIIPS countries was $5 billion on a gross and $2 billion on a net basis. However, some sources have recently focused on their FFIEC1 reported gross exposures of $39 billion to French banks, which we believe overstates their actual risks significantly.
Anyway, they have a footnote about that $39bn pointing out that it’s gross exposure and so doesn’t account for offsets or other mitigation. Given that, what does Moody’s Analytics conclude?
…the recent weakness in their market pricing indicates the degree of sensitivity to any adverse news in the current difficult period. While the headline exposures have spooked the market, we would view this as a short term phenomenon. We expect a correction of this overreaction is very likely. We have viewed MS as a work in progress as they integrate their new retail joint venture (Morgan Stanley Smith Barney) and have recommended them as most appropriate for investors with a longer horizon.
Come on guys, Morgan Stanley(‘s pricing) is just feeling a little touchy. These are trying times, after all. So trying in fact that their CDS curve has become inverted over the past month.
This is indicative of a heightened sense of concern in the near term. The 5-year point, however, is the most liquid CDS contract, so let’s have a look at that. While we’re at it, let’s throw in some Italian banks, since that seems to be all the rage lately.
Not great, but let’s get a bit more perspective by going back a bit further in time.
Not another Lehman moment yet, then. After all, Morgan Stanley is a bank holding company now, and don’t anyone forget it.
How about a more direct peer comparison though.
Wow, they are winning the race to the bottom against… Bank of America. Now there’s a place you don’t want to be.
Detroit Publishing Co. Lower Manhattan 1904
"New York Stock Exchange, Wall and Broad Streets"
Ilargi: There were mass protests in Portugal today. The country has been largely left outside of the international media recently, but the people in Lisbon still hurt. Austerity raises electricity and gas prices at the same time that jobs are lost en masse.
No-one in southern Europe bats a surprised eye at this anymore. It's become a way of life. Both the new-found poverty and the rising protests. Or perhaps we should say: the rising spirit of protest. The first waves of it have passed this spring and summer, and have done nothing to stop the cuts.
Time for Protest 2.0. The more cuts there are, the more protests there will be. For now, the world is mesmerized by lofty notions of the Arab Spring, and how it was supposed to bring democracy to the backwaters of the planet.
1000’s of deaths later, there's precious little democracy, and countries like Portugal are set for the next wave of banners in the streets (along with who knows how many others along the Mediterranean and beyond). In Greece, protests already derail the IMF's assessment of the country's debt.
And now there's Wall Street. Greece sovereign debt is presently rumored to be up for a 75% cut in troika talks. Greek banks hold little else. French banks hold a lot of Greek debt, even own some of its banks. And -enter Wall Street stage left- Morgan Stanley owns a lot of French banks' assets and/or liabilities. Not least of all is in the shape of derivatives.
Hence, Morgan Stanley was down over 10% on Friday. If French banks go down because of their exposure to Greece, Morgan Stanley will go down too. And if Morgan Stanley goes, so does everyone on Wall Street who deals with it. Which is all of Wall Street.
It’s not like you can ringfence Greece, or its banks. There are way too many links between countries on the one side and their central and commercial banks on the other. And many more links between all other central and commercial banks on the planet. There's no way just one major bank will go down the abyss. Whoever's first will take down many others.
And so the vigilantes are licking their chops and waiting for Monday. Not as nervously, though, as all them market watchers all too eager to see the collapse. The vigilantes take too much pride and joy in picking them off one at a time. Pride and joy and profits.
Morgan Stanley is not a commercial bank. It dove 10.47%. Goldman Sachs isn't either. It lost 5.33%. BofA and Citi lost less, even though they're basket cases. It goes something like this: as per Aaron Lucchetti for the Wall Street Journal:
Morgan Stanley Takes Hits
The concern with Morgan Stanley stems from its small size relative to other global financial firms and its reliance on debt markets, rather than customer deposits, to fund its business.
Ilargi: Yeah, the most threatened banks on Wall Street are now those that don't have a direct grip on your cash. And/or are in bed with France's financial system. Which sleeps with Greece, which sleeps with Bulgaria and Albania and Romania. Oh, and French banks are way over their necks into Italy. Just so you know.
Funny how we haven't heard much about Wall Street banks and their risks lately, isn't it. Well, not to worry, what's happening to Morgan Stanley will make sure we’ll have them all back on our front pages soon.
In fact, Tim Geithner's trip to Europe recently is all about that: get Europe to cover Wall Street's losses and exposure to European banks. Europe's answer: you cover the losses, why should we?!
It looks pretty sure that Germany won’t play along. And it's hard to see from where I'm sitting how the intricacies are lined up exactly, but seeing as Morgan Stanley has $56 trillion in derivatives outstanding, much of which will of necessity be on European sovereign and bank debt, and knowing that JPMorgan and BofA have even larger derivatives portfolio‘s, that 10.47% Morgan Stanley loss on Friday looks like a harbinger of things to come.
No more Markets Mr. Nice Guy for Wall Street; the banks will be knocking on all those Fed windows again soon. And it’ll be interesting to see how Geihtner and Obama react. Feel lucky, punks? Care to risk your re-election? Or do you have your Wall Street funding lined up as we speak?
Methinks it might perhaps possibly be time for electronic pitchforks. If only just to lift our feet out of the morally depleted quicksand we haven't seemed able to get out of by any other means for all this time. For all we know it might feel liberating.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Morgan Stanley Takes Hits
by Aaron Lucchetti - Wall Street Journal
Concern Over European Exposure Produces Volatile Month
Shares of Morgan Stanley sank 10% on Friday as the New York company continued fending off rumors about its exposure to troubled debt in Europe. The slump ended a month of harrowing volatility for investors in Morgan Stanley. Of the six largest U.S. banks, Morgan Stanley shares moved the most on 10 trading days in September, twice as many as Citigroup Inc.
The concern with Morgan Stanley stems from its small size relative to other global financial firms and its reliance on debt markets, rather than customer deposits, to fund its business. As jitters about potential European debt defaults grow, investors are steering clear of bank stocks that might be dragged down as collateral damage if conditions in Europe worsen.
Morgan Stanley feels the concern more acutely because it is a big player in derivatives, risky opaque contracts that can often backfire on a bank if its risk management doesn't limit losses. The situation at Morgan could turn dire if customers or lenders become skittish enough to flee. Three years ago, Morgan survived during such a panic, when it was essentially propped up by the federal government and secured a $9 billion investment from Japanese bank Mitsubishi UFJ Financial Group.
Morgan Stanley has built up its cash hoard since then and raised more equity as a buffer against potential losses. It also has gotten out of many of the risky trading businesses that eat up capital and can force big, unpredictable losses.
But the firm still is a big player in derivatives. Recent data from the Office of the Comptroller of the Currency showed Morgan Stanley had derivatives contracts with a total notional value of $56 trillion at the end of June. While that number exaggerates the total amount at risk, Morgan's figures exceed the total notional amounts at Citigroup and Goldman Sachs Group Inc. J.P. Morgan Chase & Co. and Bank of America were still well ahead of Morgan Stanley, which had the third- largest total, according to the OCC.
One of Morgan's next challenges might be holding onto key staffers, especially if cost-cutting plans and sluggish markets eat into this year's bonuses. This past week, two senior Morgan Stanley stock trading executives in London, Michel Sindelar and Cyrille Walter, announced they were leaving for Bank of America to work for former Morgan Stanley trading executive Fabrizio Gallo, people familiar with the matter said. Stock trading has been one of Morgan's strong business units of late.
Last week, investors also started focusing on Morgan's exposure to French banks after a website published a report about Morgan's 2010 annual report, which noted $39 billion in gross exposure to French banks. People familiar with the firm's finances said the figure in the report was outdated and included money being held on behalf of clients. The firm's net exposure, which takes into account hedges, is about zero, they added.
But investors don't necessarily trust hedges as much as they used to. And if the hedges are with other weakened banks, the exposure might actually be greater than zero, critics allege. "There's nothing the company can do with its statements because everyone thinks the banks are doing things off balance sheet," says Richard Bove, a Rochdale Securities analyst that has a "buy" rating on Morgan Stanley shares.
Mr. Bove suggested that Morgan Stanley use some of its $182 billion in cash and go back and buy some of its debt, whose yields have been increasing in recent days as concern about the firm grew. Friday, the firm's credit default swaps, which act as insurance against a possible default, rose to $490,000 for $10 million in protection, up from $434,000 a week ago. The debt was more expensive to protect against than Bank of America, Société Générale and Italian bank Unicredit, according to data provider Markit.
Earlier in September, Morgan did buy back some debt, and the firm's chief executive, James Gorman, talked to followers of the stock like Mr. Bove to calm market fears about the company's finances. Morgan Stanley has also attempted to clarify that its derivatives position isn't a concern, when taken in the context of its overall business and when comparing it to other large banks.
Mr. Bove also suggested that the firm could use the 17,000 brokers in its joint venture with Citigroup to boost its deposits, something he says wouldn't be difficult in the current market environment. Investors like to see more money in deposits because it is viewed as more sticky than money from bond investors who might demand exorbitant rates in unstable markets.
Separately Friday, Morgan Stanley settled a civil antitrust case with the Justice Department for $4.8 million involving its work with two New York area power companies.
Le Spleen de Morgan Stanley
by Lisa Pollack - FT Alphaville
All is not well in the kingdom of Stanley. The CDS spreads have blown out and the market is concerned. Very, very concerned. Moody’s Analytics is here to tell us all about why that is.
The first [concern] is the exposure of MS to European institutions and the second is the level of trading revenues in the third quarter. MS reported in its second quarter earnings call that net exposure to the GIIPS countries was $5 billion on a gross and $2 billion on a net basis. However, some sources have recently focused on their FFIEC1 reported gross exposures of $39 billion to French banks, which we believe overstates their actual risks significantly.
Anyway, they have a footnote about that $39bn pointing out that it’s gross exposure and so doesn’t account for offsets or other mitigation. Given that, what does Moody’s Analytics conclude?
…the recent weakness in their market pricing indicates the degree of sensitivity to any adverse news in the current difficult period. While the headline exposures have spooked the market, we would view this as a short term phenomenon. We expect a correction of this overreaction is very likely. We have viewed MS as a work in progress as they integrate their new retail joint venture (Morgan Stanley Smith Barney) and have recommended them as most appropriate for investors with a longer horizon.
Come on guys, Morgan Stanley(‘s pricing) is just feeling a little touchy. These are trying times, after all. So trying in fact that their CDS curve has become inverted over the past month.
This is indicative of a heightened sense of concern in the near term. The 5-year point, however, is the most liquid CDS contract, so let’s have a look at that. While we’re at it, let’s throw in some Italian banks, since that seems to be all the rage lately.
Not great, but let’s get a bit more perspective by going back a bit further in time.
Not another Lehman moment yet, then. After all, Morgan Stanley is a bank holding company now, and don’t anyone forget it.
How about a more direct peer comparison though.
Wow, they are winning the race to the bottom against… Bank of America. Now there’s a place you don’t want to be.
Concentrate, and ASK the 8-Ball!
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