Impact of financial crisis on Morgan Stanley

A brief chronological history follows of the impact that the financial crisis has had on Morgan Stanley in the last month or so.

In the face of its share price plunging Morgan Stanley (MS) starts talks (17/09/2008) with Wachovia and other interested parties about a possible merger. MS also talks (18/09/2008) to China Investment Corporation (CIC) (already owning a 9.9% stake) to sell a stake of up to 49%. MS management express that a stake sale to CIC is preferred to a merger with Wachovia.

Around the same time hedge funds reconsider doing business with MS and shift money out of MS’s prime brokerage as they reassess (18/09/2008) the risk of MS after Lehman’s collapse and as the cost of insuring MS’s bonds against default soars. This comes in spite of MS’s prime brokerage division being highly lucrative and the largest in the world.

These talks lose urgency after news of a government bail-out plan and are put on indefinite hold after both MS and GS are given surprise regulatory approval to turn themselves into bank holding companies. Mitsubishi UFG Group agrees to take a stake of upto 20% in MS in a $9bn deal further undermining the possibility of a merger between Wachovia and MS. Shares in MS jump 14%.

Today it is reported (26/09/2008) that last week MS lost close to a third of its assets in prime brokerage amounting to hundreds of billions of dollars as hedge funds fled. When Lehman collapsed and was put into administration $40bn of hedge fund assets were trapped and, recently, as hedge funds worried about fellow funds trapped in the Lehman collapse MS’s prime brokerage lost closer to half its assets. MS’s clients have said however that they are likely to return once markets stabilised.

To make matters worse rival banks such as JPMorgan, Credit Suisse, Citigroup, Deutsche Bank, Barclays Capital and UBS have since attracted many MS clients violating internal restrictions on doing so and despite MS executives’ efforts to persuade them not to do so when it became clear to them just how much potential custom was available.

In troubled times, GS and MS, the last two remainining large US investment banks, have been offered grace by the Federal Reserve in allowing them to becoming bank holding companies. GS has also received a cash injection of $5bn from a private investor Warren Buffett. However the paranoia, suspicion, speculation and fear prevailing in the market at the moment seem to make the market vortices indiscriminate and relentless and this has appeared to swiftly overwhelm good news in any one particular area.

In other news Washington Mututal has been seized and sold to JPMorgan Chase and talks relating to the $700bn US government bail-out fund have broken down. Reportedly the Bank of England, US Federal Reserve, the European Central Bank and the Swiss National Bank have intervened in the light of the breakdown and are now coordinating their efforts. Anyone feel the financial maelstrom widening its grip now? Is one mammoth all-encompassing solution for the entire crisis and its repercussions to date realistic or is it perhaps a little ambitious?

What next? I await every day with great curiosity.

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