Morgan Stanley lost close to a third of assets in its prime brokerage last week, amounting to hundreds of billions of dollars, as hedge funds panicked that Morgan Stanley could follow Lehman Brothers into trouble, and moved to rival banks. The losses, confirmed by several people familiar with the business, are a big blow to Morgan Stanley as its prime brokerage – the world’s biggest – is one of its most profitable businesses. The flight of cash and stock out of the division occurred as spreads in the credit default swap market ballooned, but has since slowed to a trickle. Several of Morgan Stanley’s hedge fund clients said they were likely to return to the bank once markets stabilised. The prime brokerage, which provides hedge funds with custody and loans and assists short selling, is highly rated by many managers. Many of the world’s biggest hedge funds moved their assets to commercial banks last week.
