Morgan Stanley perplexes Wall Street as bank loses $20bn
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09/18/2008 09:07 PM
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Big hedge funds reassess Morgan Stanley risk
By James Mackintosh in London
Published: September 18 2008 03:00 | Last updated: September 18 2008 03:00
A series of large hedge funds switched money out of Morgan Stanley's prime brokerage or were considering moving after the cost of insuring the investment bank's bonds against default soared and Lehman Brothers collapsed.
Many hedge fund managers said they were reassessing the risk of doing business with Morgan Stanley and, to a much lesser extent, Goldman Sachs after the failure of Lehman and agreed takeover of Merrill Lynch left only two large US broker-dealers.
The moves come amid widespread concerns at hedge funds and banks about renewed risks of failure of a market counterparty as a result of the US decision to allow Lehman to fail.
Morgan Stanley's lucrative prime brokerage division, the world's largest, lost low single-digit percentages of balances on Monday and Tuesday, according to people familiar with the business. Rivals say many funds are putting legal agreements in place to allow more to shift, and both funds and competitors said the move of cash balances accelerated yesterday, with one estimating there was over $20bn (£11bn) left.
The reviews by hedge funds follow the leap in the cost of Morgan Stanley credit default swaps, a form of insurance against default, in the past three days.
The cost of protecting its debt, equivalent to about 1,000 basis points, is now far higher than that of Bear Stearns immediately before its rescue, while its shares closed 24 per cent lower yesterday.
Several hedge funds said they did not believe Morgan Stanley was likely to collapse but, in the current markets, they had to err on the side of caution.
"Unless you were alive and trading in 1929 you have never seen anything like this," one said. "It is not about reality, it is about perception," said another.
So far only moderate balances appeared to have been removed from the bank, rivals said, and it remains unclear to what extent hedge funds will shift.
Morgan Stanley said it had "a strong capital and liquidity position, as evidenced by the nearly $180bn in liquidity we reported [this week] as part of our strong third quarter results.
"All of our prime brokerage client assets account for only a minimal amount of our liquidity. Despite recent market volatility, we are confident that Morgan Stanley will maintain an industry-leading prime brokerage franchise."
Morgan Stanley is the world's biggest prime broker, providing leverage, short-selling and settlement services to hedge funds. Goldman Sachs, the second-largest prime broker, is also being reviewed by some funds.