Take a trip down memory lane to mid-September, when selling in Morgan Stanley (MS) became so intsense that the firm was nearly driven to merger with Wachovia (of all banks), while its CEO John Mack successfully lobbied the government to institute a temporary ban on the shorting of financial stocks.
Mack’s charge was that rumomongering, coupled with a vicious feedback loop between the stock and the CDS market threatened to destroy the company, absent some emergency intervention.
Today, the WSJ depicts the storm that had engulfed the company. The author does a good job of capturing the fear and intensity of the moment, but here are the sanitised points:
- Somehow, a rumour emerged that Deutsche had pulled a $25 billion credit line from MS. This was false, but it got spread anyway.
- Another rumours was that the company stood to lose $200 billion in AIG exposure, which again, was false.
- Several major firms including Merrill Lynch & Co., Citigroup Inc., Deutsche Bank and UBS purchased credit default swaps on Morgan, in order to hedge related business.
- A number of hedge funds sold short Morgan Stanley shares.
- A number of hedge funds sought to take some or all of their money out of Morgan Stanley.
- Some hedge funds did both simultaneously, including Millenium Partners, which also bought puts on Morgan Stanley stock.
- At one point, redemption withdrawal got so heavy that Morgan Stanley couldn’t process them all.
- When John Mack sent out a memo blaming shorts and hedge funds, longtime client Jim Chanos freaked out and pulled his money.
So what does the story tell us? Yes, there were false rumours that got out there, though that doesn’t mean they were intentionally disseminated to drive down the stock price. The article offers no evidence that they were.
Beyond that, thre’s nothing that looks like “financial terrorism” or a “bear raid” in the way you hear those terms bandied about. Far from being a coordinated attack on Morgan Stanley, there were a lot of uncoordinated actions by self-interested players. Most of it sounds pretty rational, which is perhaps the scariest part. When a bank loses it’s trust, that’s rightly devastating.
The other thing to look at is the stock price. Morgan Stanley shares are off about 50% since then, and that was pre-TARP. Like Citi (C), the company has a market value that’s less than the cash its taken in, between the government injection and the sweetheart deal it got from Mitsubishi. Amid what sounds like chaos, the market had a pretty good sense that something was wrong with the company, even at its battered down share price.
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