Photo: Morgan Stanley
There’s a totally baseless rumour going around that Morgan Stanley is about to issue a press release about their French bank exposure.We have no idea if that’s the case, but the stock is tanking, and not helping things is this ZeroHedge post about Morgan Stanley’s exposure to French banks… which have been getting killed.
According to Morgan Stanley’s latest 10K, which has the figures as of December 31 2010 (check them out below), the bank has $39 billion in exposure to French banks, up $30 billion since 2009.
Thank goodness they’ve reduced their exposure since then.
UPDATE (from an analyst note): It’s important to note that the 10K data materially distorts actual exposures in many ways. The distortion is primarily because the 2010 10K is out of date. It did not include the updated 1Q11 data, which shows that MS shrunk these gross exposures by $17.4bn during 1Q11 to $21.6bn.
1) in OTC derivatives, the data excludes the netting of offsetting positions (i.e. netting long and short positions against each other) and collateral – a huge flaw given the large gross numbers associated with derivatives
2) the FFIEC data includes only one side of reverse repo positions, not factoring the offsetting “matched book” positions – another large overstatement
3) the data does not include hedges on loans such as CDS protection purchased; and 4) this data includes cash deposits by MS at French banks – a materially lower risk than making a loan to a French bank.
After adjusting for these flaws, Morgan Stanley has publicly stated that its net exposure to France is ZERO, and its net exposure to PIIGS is just $2bn – the lowest in the industry along with GS.
Original: The exposure detailed in MS’s 2010 10k seems a huge problem because:
- There are reports about French banks going cap in hand to the Middle East looking for fresh cash. (BNP’s CEO has denied that he’s on a cash hunt in the Mideast, and he says his bank is fully capitalised.)
- El-Erian said this morning that “These are all signs of an institutional run on French banks.”
In other words, French banks have tons of exposure to the Eurozone crisis, which is worsening by the day. If Greece defaults in a disorderly way (in a way that Euro finance ministers have not seen coming and prepared effectively for), it could disrupt the global financial system, according to George Soros, and anyone watching what’s going on. Christine Lagarde at the IMF says Euro banks need to urgently recapitalize to fix this ASAP, as they have $410 billion in credit risk exposure to the Eurozone crisis — which as we said is unresolved, worsening, and has the potential to destroy the global financial system.
Whatever negative outcome might come of all of this would particularly hurt French banks, which have the biggest exposure to Greece of all the Euro banks. (Greece is on the verge of defaulting of course.)
- Morgan Stanley’s exposure to French banks (see it below) is 60% their market cap
- It’s also more than half their book value
The good news for Morgan Stanley is that Credit Suisse just put out an analyst note defending MS’s exposure to French banks. They write:
We see peripheral risk at $2B inclusive of French Banks and very manageable in context of the capital base, liquidity, and funding profile. We see very little net exposure to French Banks for MS.
We’ve called and emailed Morgan Stanley for a comment. They haven’t gotten back to us yet.
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