Saturday, October 01, 2011 8:36:08 PM
From Forbes with Mark Gongloff of Bloomberg.
Morgan Stanley, Bank of America and JP Morgan may only have months of liquidity left
By Mark Gongloff
Bloomberg
One of the things rattling Morgan Stanley’s stock price today was a draft note by Bloomberg economist Joseph Brusuelas that discussed reasons for the company’s wide CDS spreads.
The note, which Mr. Brusuelas says was never meant for external consumption, had an error about the company’s net exposure to French banks.
It turns out that note had another error, too, in its estimate of the size of the bank’s derivatives exposure.
In the note Mr. Brusuelas suggests Morgan Stanley has $1.793 trillion in notional derivatives contracts outstanding, linking to an OCC report with that data. Liquidity at Morgan Stanley could rapidly be shrinking.
But a closer look at that report reveals that Morgan Stanley’s notional outstanding is actually much, much bigger — about $56 trillion in total. Mr. Brusuelas’s number includes only the exposure of Morgan Stanley’s commercial bank operations, which are very small, and misses the exposure of its holding company.
What’s also missing, however, is the context that this is not an unusually large derivatives exposure among the Too Big to Fail Set. J.P. Morgan has about $79 trillion — trillion, with a T — in notional derivatives contracts outstanding, for instance.
Finally, these gigantic numbers represent the notional value of underlying contracts. The net exposure is actually much, much smaller. J.P. Morgan’s total credit exposure, according to the OCC report, is about $360 billion.
That’s still a huge number — but a little more in the realm of normal human numbers than $78 trillion. We don’t know the comparable number for Morgan Stanley because OCC doesn’t give it.
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