Inside Morgan Stanley there is a lot of talk this afternoon about a potential government takeover. The widespread expectation that Mitsubishi will attempt to renegotiate its investment in the firm, if not walk away altogether, and the looming threat of downgrades from S&P and Moody’s, has many wondering if the firm can make it into next week intact.
Although there are rumours at Morgan Stanley about a term sheet “floating around” describing the terms under which the Treasury would take over Morgan Stanley, this is probably more reflective of panic at the firm than any actual knowledge of the government’s plans. With the stock sinking down each day this week and the credit markets all but closed to the firm, customers and counter-parties must have at least begun reassessing their exposure to Morgan Stanley. If it looks as if a Bear Stearns style run on the bank may get started, the Treasury may be prodded to action.
Inside the Federal Reserve, it’s widely believed that the negative implications of the collapse of Lehman Brothers were badly underestimated. Armed with a mandate from Congress and the President to stabilise the markets, it’s now quite likely that the government would take action if it feared Morgan would collapse.