Storm Clouds Over Morgan Stanley


Morgan Stanley’s credit default swaps and bond yields are climbing, signaling that investors are concerned about the firm’s creditworthiness. The price of a credit default swap on Morgan Stanley represents the price demanded to insure its debt against default. The higher the price, the greater the risk the bank will default, in the eyes of its insurers. According to Moody’s Analytics, Morgan Stanley’s credit default swap price level implies a credit rating of Ba2, which is non-investment grade, speculative ? aka junk. That is down from Ba1 (also junk level) a month ago and vastly below the high-grade rating of A2 assigned by Moody’s Investors Service (a different Moody’s company).

While some argue that credit default swaps are not good indicators of creditworthiness because they are generally thinly traded (meaning a single buyer could disproportionately increase the price), others point out that Morgan Stanley’s credit default swaps have more than tripled in volume over the last 6 months, and trade over 12 times more frequently than typical “actively traded” swaps.

There is concern that Morgan Stanley has billions of dollars invested in the bad debt of France, but there may be more to it, namely exposure to the bad debt of Greece, Ireland, Italy, Portugal and Spain. “Their spreads just are galloping wider,” Allerton Smith, a banking-risk analyst at Moody’s Analytics, was quoted as saying, adding: “Is it rational that Morgan Stanley CDS spreads would be wider than French bank CDS spreads if the concern is exposure to French banks? I don’t think that makes perfect sense.”

Traders are reportedly concerned that Morgan Stanley’s about the bank’s reliance on debt markets rather than customer deposits to fund its business, that its trading cannot produce sufficient returns, and that a bidder for Morgan Stanley seems unlikely. Morgan Stanley is reported to be a big player in the risky, opaque derivatives business that is subject to the risk of very large losses, and is also now regulated by Dodd-Frank. Its common shares are said to trade at approximately 50% of its tangible book value.

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