We are fans of Morgan Stanley CEO John Mack, but we were annoyed by his description of the incineration of $9.4 billion as “embarrassing.” It’s not “embarrassing.” It is a disaster.
Morgan Stanley is 72 years old. It took the firm 72 years to build the value it had last July, before Mr. Mack’s mortgage trading desk’s crazy mortgage bets went bad. And those bets went so bad that, after five short months, Mr. Mack had to sell up to 10% of the company’s equity at a 50% discount just to preserve the company’s capital ratios.
Looked at differently, that’s about a year’s worth of operating earnings for the entire firm–gone. Morgan Stanley’s tens of thousands of employees will break their backs for the next 12 months just to replace the book value that a single trading desk vaporized. Morgan Stanley’s shareholders, meanwhile, will never recoup the dilution they suffered in Morgan Stanley’s emergency firesale.
We like Mack, and we agree that he still may be the right guy for the job, but Morgan Stanley’s news this morning was worse than “embarrassing.”
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