Morgan Stanley, Goldman Plummet After AIG Takeover (Update2)
By Christine Harper
Sept. 17 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc., the biggest U.S. securities firms, tumbled the most ever in New York trading after a government rescue of American International Group Inc. failed to ease the credit crisis. The cost to protect against a default by the banks rose to a record.
Goldman fell as much as 26 percent on the New York Stock Exchange and Morgan Stanley plunged 44 percent, leading financial stocks to the lowest level in four years.
``They're fish in the barrel, the short sellers have them targeted,'' said William Smith, whose firm Smith Asset Management Inc. in New York manages $80 billion, including Goldman stock. ``Morgan Stanley's probably going to wind up doing a deal, it's really a matter of survival.''
HSBC Holdings Plc, Wells Fargo & Co. and JPMorgan Chase & Co. are among the potential bidders for a Wall Street firm, according to Anton Schutz, president of Mendon Capital Advisors. Goldman and Morgan Stanley have both done deals with Chinese companies: China Investment Corp., the state-controlled investment fund, bought a stake in Morgan Stanley in December, and Goldman invested in Industrial & Commercial Bank of China Ltd. in 2006.
HSBC, Europe's largest bank, is not in talks with Morgan Stanley and isn't interested in pursuing a deal with the company, people with knowledge of the London-based bank's plans said today. HSBC spokesman Donal McCarthy declined to comment.
Julia Tunis Bernard, a spokeswoman for Wells Fargo, the largest U.S. bank on the West Coast, declined to comment. Joseph Evangelisti, a spokesman for JPMorgan, the second-biggest U.S. bank, also declined to comment.
Stock Declines
Morgan Stanley dropped $7.70 to $21, the lowest in almost 10 years, in composite trading on the New York Stock Exchange at 3:05 p.m. Goldman slumped $23.06 to $109.95, a three-year low.
Credit-default swaps protecting against a default on Morgan Stanley bonds rose 220 basis points to 900 basis points, and earlier today traded at 925, according to broker Phoenix Partners Group in New York. Contracts on Goldman climbed 110 basis points to 530 basis points, Phoenix data show. An increase in price for the contracts indicates a deterioration of the perception of credit quality.
Executives at Goldman Sachs and Morgan Stanley told analysts and investors yesterday that they see no need to combine with banks even after Merrill Lynch & Co.'s emergency sale to Bank of America Corp. over the weekend and Lehman Brothers Holdings Inc. bankruptcy filing. Goldman and Morgan Stanley said they have adequate capital and cash and don't have any pressing need to borrow new money. Spokesmen for both firms declined to comment.
Stable Funding
Analysts including David Trone at Fox-Pitt Kelton Cochran Caronia Waller have said the demise of Lehman and Merrill may force Goldman and Morgan Stanley to pursue a sale or some sort of transaction with a bank, to gain a stable funding base of deposits and the confidence of the markets. The firms hold more than $20 of assets for every $1 in capital, making them dependent on lenders.
``From what Goldman said on their conference call, they said they're going to go it alone,'' Smith said. ``But when you're leveraged it's not up to you, it's up to your trading counterparties.''
Morgan Stanley Chief Executive Officer John Mack and Goldman's Lloyd Blankfein are trying to navigate declining investor confidence that prompted the emergency sales of Merrill Lynch and Bear Stearns Cos., and the bankruptcy of 158-year-old Lehman.
`Rumor and Fear'
The turmoil spurred the U.S. government late yesterday to lend as much as $85 billion to AIG to prevent the insurer's collapse.
Markets are reacting to ``rumor and fear,'' Colm Kelleher, Morgan Stanley's finance chief, said yesterday after the New York-based company reported better-than-estimated earnings for the third quarter.
Credit-default swaps on Morgan Stanley and Goldman rose for the third day. Contracts on Charlotte, North Carolina-based Wachovia Corp. approached a record reached yesterday. Contracts on AIG plunged.
Glenn Schorr, an analyst at UBS AG, said today in a note to investors that the market reaction was ``insanity.'' Goldman and Morgan Stanley aren't at risk of running out of money because they keep plenty of cash on hand and can borrow from the Federal Reserve and a consortium of banks set up over the weekend, he said, noting that both have enough capital to absorb any losses.
Locked Up
``If you have the liquidity and capital to withstand the storm, why should CDS spreads be having such a big impact on stocks?'' he wrote. He said investors must be reacting to concern that counterparties or clients will abandon the firms or that the credit-rating companies will cut their ratings.
``At the heart of these issues is available funding, all in funding costs and the inherent mismatch of short-term funding and longer duration, levered balance sheets,'' Schorr said.
Credit markets have been locked up since New York-based Lehman, which was the fourth-largest U.S. securities firm, filed for bankruptcy protection on Sept. 15, raising concern that other financial companies may fail. Investors have been unwilling to take on new debt risk and overnight lending rates have soared.
Morgan Stanley's plunge may add impetus to calls from Democrats in Congress for a broader effort by policy makers to address the financial crisis, including setting up a government agency to take on devalued assets.
``The private market screwed itself up and they need the government to come and help them unscrew it,'' House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters late yesterday after top lawmakers met with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke.
Frank this week proposed considering an agency to ``deal with all the bad paper out there'' and get financial markets ``out of the box'' they are in.
To contact the reporter on this story: Christine Harper in New York at [email protected].
Last Updated: September 17, 2008 15:25 EDT
By Christine Harper
Sept. 17 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc., the biggest U.S. securities firms, tumbled the most ever in New York trading after a government rescue of American International Group Inc. failed to ease the credit crisis. The cost to protect against a default by the banks rose to a record.
Goldman fell as much as 26 percent on the New York Stock Exchange and Morgan Stanley plunged 44 percent, leading financial stocks to the lowest level in four years.
``They're fish in the barrel, the short sellers have them targeted,'' said William Smith, whose firm Smith Asset Management Inc. in New York manages $80 billion, including Goldman stock. ``Morgan Stanley's probably going to wind up doing a deal, it's really a matter of survival.''
HSBC Holdings Plc, Wells Fargo & Co. and JPMorgan Chase & Co. are among the potential bidders for a Wall Street firm, according to Anton Schutz, president of Mendon Capital Advisors. Goldman and Morgan Stanley have both done deals with Chinese companies: China Investment Corp., the state-controlled investment fund, bought a stake in Morgan Stanley in December, and Goldman invested in Industrial & Commercial Bank of China Ltd. in 2006.
HSBC, Europe's largest bank, is not in talks with Morgan Stanley and isn't interested in pursuing a deal with the company, people with knowledge of the London-based bank's plans said today. HSBC spokesman Donal McCarthy declined to comment.
Julia Tunis Bernard, a spokeswoman for Wells Fargo, the largest U.S. bank on the West Coast, declined to comment. Joseph Evangelisti, a spokesman for JPMorgan, the second-biggest U.S. bank, also declined to comment.
Stock Declines
Morgan Stanley dropped $7.70 to $21, the lowest in almost 10 years, in composite trading on the New York Stock Exchange at 3:05 p.m. Goldman slumped $23.06 to $109.95, a three-year low.
Credit-default swaps protecting against a default on Morgan Stanley bonds rose 220 basis points to 900 basis points, and earlier today traded at 925, according to broker Phoenix Partners Group in New York. Contracts on Goldman climbed 110 basis points to 530 basis points, Phoenix data show. An increase in price for the contracts indicates a deterioration of the perception of credit quality.
Executives at Goldman Sachs and Morgan Stanley told analysts and investors yesterday that they see no need to combine with banks even after Merrill Lynch & Co.'s emergency sale to Bank of America Corp. over the weekend and Lehman Brothers Holdings Inc. bankruptcy filing. Goldman and Morgan Stanley said they have adequate capital and cash and don't have any pressing need to borrow new money. Spokesmen for both firms declined to comment.
Stable Funding
Analysts including David Trone at Fox-Pitt Kelton Cochran Caronia Waller have said the demise of Lehman and Merrill may force Goldman and Morgan Stanley to pursue a sale or some sort of transaction with a bank, to gain a stable funding base of deposits and the confidence of the markets. The firms hold more than $20 of assets for every $1 in capital, making them dependent on lenders.
``From what Goldman said on their conference call, they said they're going to go it alone,'' Smith said. ``But when you're leveraged it's not up to you, it's up to your trading counterparties.''
Morgan Stanley Chief Executive Officer John Mack and Goldman's Lloyd Blankfein are trying to navigate declining investor confidence that prompted the emergency sales of Merrill Lynch and Bear Stearns Cos., and the bankruptcy of 158-year-old Lehman.
`Rumor and Fear'
The turmoil spurred the U.S. government late yesterday to lend as much as $85 billion to AIG to prevent the insurer's collapse.
Markets are reacting to ``rumor and fear,'' Colm Kelleher, Morgan Stanley's finance chief, said yesterday after the New York-based company reported better-than-estimated earnings for the third quarter.
Credit-default swaps on Morgan Stanley and Goldman rose for the third day. Contracts on Charlotte, North Carolina-based Wachovia Corp. approached a record reached yesterday. Contracts on AIG plunged.
Glenn Schorr, an analyst at UBS AG, said today in a note to investors that the market reaction was ``insanity.'' Goldman and Morgan Stanley aren't at risk of running out of money because they keep plenty of cash on hand and can borrow from the Federal Reserve and a consortium of banks set up over the weekend, he said, noting that both have enough capital to absorb any losses.
Locked Up
``If you have the liquidity and capital to withstand the storm, why should CDS spreads be having such a big impact on stocks?'' he wrote. He said investors must be reacting to concern that counterparties or clients will abandon the firms or that the credit-rating companies will cut their ratings.
``At the heart of these issues is available funding, all in funding costs and the inherent mismatch of short-term funding and longer duration, levered balance sheets,'' Schorr said.
Credit markets have been locked up since New York-based Lehman, which was the fourth-largest U.S. securities firm, filed for bankruptcy protection on Sept. 15, raising concern that other financial companies may fail. Investors have been unwilling to take on new debt risk and overnight lending rates have soared.
Morgan Stanley's plunge may add impetus to calls from Democrats in Congress for a broader effort by policy makers to address the financial crisis, including setting up a government agency to take on devalued assets.
``The private market screwed itself up and they need the government to come and help them unscrew it,'' House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters late yesterday after top lawmakers met with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke.
Frank this week proposed considering an agency to ``deal with all the bad paper out there'' and get financial markets ``out of the box'' they are in.
To contact the reporter on this story: Christine Harper in New York at [email protected].
Last Updated: September 17, 2008 15:25 EDT
