When a top news item on Wednesday is that a big investment bank was NOT in merger discussions as of late Tuesday, one begins to wonder. And why wouldn’t one?
Under the old “where there’s smoke there’s fire” view of things, Tuesday’s ardent defence by Goldman Sachs and Morgan Stanley of their standalone investment banking model is looking a little thin - at least, when it comes to Morgan Stanley.
CNBC reports on its website Wednesday that MS is weighing whether it should remain independent or merge with a bank, given the recent turbulence in the company’s share price.
While Morgan Stanley officials were “not in merger talks as of late Tuesday,” according to CNBC, it adds: “But senior people at Morgan concede that further zig-zags in the company’s stock price could and possibly will force the company to change course and seek a merger partner, probably a well-capitalized bank”. [And there are plenty of those, as we all know].
As Lex notes on Wednesday, both Goldman and MS maintain that, despite market upheavals, they do not need to seek the ballast of retail deposits. On Tuesday, they pointed to ample liquid assets, high and rising Tier 1 capital ratios - no matter how degraded that measure - and increased book value per share.
But, warns Lex, “with the Fed’s expanded funding window supporting the industry, one looming threat to the broker-dealer model may be a heavier regulatory burden - meaning yet more capital, lower leverage and more disclosure”.
CNBC notes:
Morgan Stanley CEO John Mack wants to avoid the mistake made by Lehman Brothers CEO Richard Fuld, who brushed aside buyout offers until the market crushed shares of the firm and force it into bankruptcy.
Morgan, analysts say, has a stronger balance sheet than Lehman and recently pre-announced financial results showing profits for the third quarter, and a lower than expected decline of 7.7 percent from the third quarter of last year.
But Wall Street traders are increasingly betting that Morgan might not survive–the costs of so-called credit default swaps which are insurance policies against Morgan defaulting on its bonds, shot up on Tuesday, forcing the company’s pre-announcement.
For this reason, Mack is carefully monitoring the market reaction and may indeed decide to do a deal if it looks like the firm could face a liquidity crisis as traders begin to pull funding from the firm.
The last word, for now, anyway, goes to Morgan Stanley CFO Colm Kelleher who said Tuesday: “These markets are all about confidence and we are proudly confident in the robustness of our franchise, business model and balance sheet”.
But after another day’s battering left Morgan Stanley’s shares down almost 11 per cent, while the spreads charged to insure against the bank’s default widened to almost 800bp, we wonder if the bank’s move to suddenly rush-out its Q3 earnings announcement a day before schedule was yet another sign of confidence in its “robust franchise and business model”?
