Safehaven | When Blatant Government Market Manipulation Won't Help You... The Run on Morgan Stanley

September 19, 2008

When Blatant Government Market Manipulation Won't Help You... The Run on Morgan Stanley
by Reggie Middleton

Note to Commissioner Cox: You have doomed the last two independent investment banks. Congratulations. By actually trying to directly manipulate the US capital markets by literally banning the short selling of a certain cadre of stocks (while allowing the long buying of those same stocks) you have upset the natural equilibrium of our capitalistic environ. You must learn to wrap your mind around, and grasp the difference between, price and value. The short sellers were driving the prices of these investment banks down to match their value. Now, with your short sighted intereference, you have allowed - no, let's be more accurate, you have overtly facilitated the divergence between price and value.

For one, you cannot prevent astute investors from taking bearish positions on a company. You preside over the most advanced, and complex financial markets in the history of the world, not some third world nation that is just opening its first exchange as an extension of the town food market!

Word has it that the clients of Morgan Stanley are fleeing, despite (or maybe even because - due to the drastic socialist nature of) your actions. Because you have allowed longs to bid prices up way above their intrinsic economic value, you have injected an unprecendented amount of volatility into the system. This increases the cost of capital, my friend, not decrease it. When the truth meets reality, what do you think will happen to share prices? That's right, they will fall that much more. A market needs two sides to a trade, not just one. I hear you plan on preventing investors from selling stocks at a loss next, which will be music to the ears of those at the IRS!


	Discount Window Shatters Record AIG bailout adds $28B to tally; investment bank demand surges During a week that witnessed the collapse of a major investment bank and the bailout of the world's largest insurer, lending through the Fed's discount window shattered all records, totaling $121.3 B.

From FT Alphaville:
This is a pretty stunning line to read:

"We need a merger partner or we're not going to make it," Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested.

What might Mack have had on his mind? Afterall, only the other day he was supposedly telling MS employees that everything was just fine, notwithstanding the destructive antics of rumour-mongering short sellers.

We're hearing everything is not just fine. Dealbreaker notes that MS prime brokerage clients are heading for the hills.

We've heard a few tentative numbers - with outflows of prime brokerage business from MS of between $20bn and $120bn being rumoured.

JPM is thought to have taken on board $40bn of prime brokerage accounts in the past 48 hours alone. They have been "inundated".

It's very much a run on the bank. The collapse of key prime brokerage accounts is exactly what nailed the lid shut on Bear's coffin even as its executives were bemoaning the share price collapse and touting its strong liquidity position.

Little wonder then that MS is in talks with a number of parties.

Comment from Sam Jones, the FT blogger:

Readers, some clarity: the numbers being reported on PB outflows from MS are quite obviously speculative: anywhere between $20bn and $120bn we quote. That's quite some deviation... we report it to emphasis the fear out there.

Even so, we have checked our core facts... we know that hedge funds ARE switching - there IS a big pullback from MS. JPM have indeed been "inundated". We are not rumour mongering here.

And if you need more concrete market proof, then ask yourselves why MS is in talks. Bloomberg are now reporting that they are negotiating the potential sale of a 49% stake to CIC... I do not think that would be entered into lightly. Get your heads out the sand!

Jones/Alphaville

UPDATE: Mr Mack's comments are being denied - aggressively

Now it's the media's fault...

Or the short-sellers?

14:31 CITIGROUP INC SAYS COMMENTS ATTRIBUTED TO MORGAN STANLEY'S MACK IN NEW YORK TIMES ON THURSDAY "WERE NEVER STATED BY MR. MACK TO MR. PANDIT."

14: 33 NEW YORK TIMES HAD REPORTED THAT MORGAN STANLEY CEO MACK TOLD CITIGROUP INC CEO PANDIT. "WE NEED A MERGER PARTNER OR WE'RE NOT GOING TO MAKE IT."

From Reuters.

One wonders why the qualifying phrase "to Mr. Pandit" was necessary. Basically, Mr. Mack did say it, just not directly to Mr. Pandit.

Even if that weren't reason enough to run scared, just look at their fundamentals! Peruse a professional investor's opinion of last quarter's results, or just compare the investment banks and you will see it is highly unlikely they will remain both independent and a going concern in the near future. This is even more assured thanks to the volatility that Mr. Cox is injecting into the system. These companies share prices will come crashing down because their business model is antiquated, and broken. The only difference now is that the will crash twice instead of once.

If I were to give Mr. Cox some unsolicited advice (ain't that the best type?), I would suggest that he use his regulatory powers to open up the books of these companies and let us investors get a clear look at what's in them. At this point it is a farce to believe that we are fooled by the off balance sheet, hide the sausage game. If we can't see it, we default to the worste possible conclusion and work our way up from there. I, personally, would love to go long certain firms if I was clear I knew what it was I was going long on. True transparency will allow for price discovery, and that alone is what will bring liquidity back to the markets - and do so without the volatility that these doomed shenanigans are bound to produce.

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

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