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Finance & Stock Groups Forum Index » Stock Investments » Anatomy of a panic? The collapse of Morgan Stanley
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| Don Tiberone |
 Posted: Thu Nov 27, 2008 5:29 am |
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http://ftalphaville.ft.com/blog/2008/11/25/18667/anatomy-of-a-panic-the-collapse-of-morgan-stanley/
Anatomy of a panic? The collapse of Morgan Stanley
From the WSJ:
It turns out that some of the biggest names on Wall Street — Merrill
Lynch & Co., Citigroup Inc., Deutsche Bank and UBS AG — were placing
large bets against Morgan Stanley, the records indicate. They did so
using complicated financial instruments called credit-default swaps, a
form of insurance against losses on loans and bonds…
…during those tumultuous few days in mid-September, the swaps market
turned on Morgan Stanley like a financial Frankenstein.
Disclaimer:
No evidence has emerged publicly that any firm trading in Morgan
Stanley stock or credit-default swaps did anything wrong. Most of the
firms say they purchased the credit-default swaps simply to protect
themselves against potential losses on various types of business they
were doing with Morgan Stanley.
Indeed it would be madness for Merrill, Citigroup, DB et al to
actually be trying to bring down MS as the article suggests, given the
systemic risks that kind of collapse would pose.
The picture is much more subtle and insidious than the WSJ and Andrew
Cuomo et al make out. Sure there was a panic at MS - and a run on the
bank - but it wasn’t caused by some cabal of CDS traders, or puppets
whose strings were being pulled from the C-suite floors of rival
banks. It was just a perfect example of human behaviour - and a series
of fallacies.
Just look what happened after John Mack started lobbying to have short-
selling banned, for example:
…hedge-fund managers were up in arms. Some yanked business from Morgan
Stanley, moving it to rivals including Credit Suisse, Deutsche Bank
and J.P. Morgan. They said the trading represented legitimate
protection and speculation.
Hedge-fund veteran Julian Robertson Jr. and James Chanos, a well-known
short seller, both longtime Morgan Stanley clients, were both angry.
Mr. Chanos says he “hit the roof” when he heard about Mr. Mack’s memo..
After the stock market closed that day, Mr. Chanos decided that his
hedge fund, Kynikos Associates, would pull more than $1 billion of its
money from a Morgan Stanley account.
“It’s one thing to complain, but another to put out a memo blaming
your clients,” says Mr. Chanos, who adds that the development all but
ended a more-than-20-year relationship with Morgan Stanley. He says
his fund hadn’t bought any Morgan Stanley swaps or sold short its
stock.
Indeed, the collapse of MS’s prime brokerage operation was a serious
crisis, if not the serious crisis.
…within days, more than three-quarters of Morgan Stanley’s roughly
1,100 hedge-fund clients had put in requests to pull some or all of
their assets from the firm, according to a person familiar with the
operation.
Enough of a crisis to cause the collapse of the bank.
No one is denying that the market was boiling with rumours in the days
after LEH. But you have to ask yourself, what allowed those rumours to
take hold? Why did no-one believe the protestations of John Mack? Take
a look at any bank’s regulatory filing in Q2 2007 and you can see why.
No disclosure. No clarity about off-balance sheet risk, or exposures
before hedging or netting. Little wonder that rumours such as this -
The chatter among hedge funds was that Morgan Stanley had $200 billion
at risk as a trading partner with American International Group Inc.,
the big insurer on the brink of a bankruptcy filing, according to
traders. That wasn’t true. Morgan reported in an SEC filing that its
exposure to AIG was “immaterial.”
- could gain so much currency. Never mind what was said in the SEC
filing. Was that, afterall, “immaterial” in the sense that there was
none, or “immaterial” in the sense that its exposure had been rehedged
using other counterparties?
To boot: rumours about Morgan Stanley did not start after Lehman
collapsed - they were running for days if not weeks concurrently with
those surrounding Lehman. After Lehman was allowed to go under, MS was
- according to an extant twelve month narrative of surprise writedowns
and out-of-the-blue losses - the natural next domino to fall.
And most of all, forget not that the collapse of Lehman was a
veritable earthquake on Wall Street.
CDS on investment banks were not spiking anomalously, they were
spiking because more than ever it was likely that there would be
another actual default. If ever there was a time to go crazy buying
protection on MS, this was it!
In the days after Lehman it wasn’t just likely that another bank would
collapse, it was - save a government bailout or the shuttering of the
markets - inevitable.
Little wonder people were panicking. |
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