The Mack doth protest too much… as Morgan Stanley watches the spreads on its credit default swaps climb and tries to stem the flow of clients from its prime brokerage services, John Mack has stepped up his efforts to reassure the world – and particularly Mitsubishi UFJ Group – that his bank is sound.
Ahead of Tuesday’s confirmation that MUFG’s agreement to invest $9bn in Morgan Stanley remained on track, the Fed invoked “unusual and exigent” market circumstances at the weekend to speed up approval of the deal.
When speculation spread Tuesday that MUFG might back out of its commitment, Mack jumped on the phone, telling clients the deal was on course, reports the Wall Street Journal. A memo he sent to the Morgan Stanley’s 46,000 employees decried “the extreme volatility” of “a rumor-a-minute environment.” And MUFG issued a separate denial, reiterating that the deal is expected to close Tuesday.
Lucky Mack. If he was dealing with a big bank from any other country, we couldn’t guarantee such impeccable behaviour from a prospective buyer up to now. But we’re sure he’s sweating.
On Thursday night he hosts a very important dinner in London for top executives of MUFG, according to the Wall Street Journal. We can just imagine the dinner conversation:
“So Mr Mack, your share price and CDS spreads don’t necessarily seem to be - err, going in your favour…could you pass the salt please…”
Morgan Stanley’s share price dropped 25 per cent on Tuesday after plunging 40 per cent earlier in the day, and fell a further 5 per cent on Wednesday - the stock’s lowest closing price in 10 years, with the shares down 68 per cent so far this year.
Spreads on Morgan Stanly credit default swaps meanwhile ticked back up above 21 per cent on Thursday after Market Watch noted Wednesday that its spreads were trading at 19.5 per cent upfront, according to Phoenix Partners Group, down from 20 per cent upfront Tuesday, but still at distressed levels. By comparison, Morgan Stanley CDS spreads in mid-September were less than 600bp above Treasury bond yields.
Mack, who took over as chief executive of the Wall Street firm in 2005, on Wednesday went on another round of PR to convince shareholders, trading partners and employees not to believe the latest round of doom scenarios swirling around the firm.
In a staff meeting in London on Wednesday, one employee asked Mack about the surging CDSs. He told the crowd that it was a “temporary” phenomenon that should dissipate once credit markets return to more normal conditions, according to the Journal.
He added that some traders have been buying default protection as another way to bet against the company’s prospects, while the temporary ban on short selling has been in place.
But another reason for Mack’s undoubted nervousness is the prospect of a “short-sellers’ revenge” as the ban is set to be lifted Thursday. This has yet to materialise however, with the stock up 1.9 per cent as of 9:05 a.m. in New York.
Most worryingly for Mack is that Morgan Stanley - once one of the world’s top prime brokers and now one of the only two remaining US broker/dealers alongside Goldman Sachs, has been bleeding clients from its prime brokerage services, as the FT said last month. The rush out the door by hedge funds and others has accelerated in recent days, according to investors. Among the beneficiaries has been Deutsche Bank.
To be fair, as the Journal noted:
Morgan Stanley is well-capitalised enough to fund itself through the third quarter of 2009 without raising new long-term debt, wrote Bernstein Research analyst Brad Hintz in a recent report. For now though, the debt issuance market is effectively ‘closed to the company,’ he added. Glenn Schorr, an analyst with UBS, said the company’s position would improve if it is able to agree to a ’sizable’ credit facility from Mitsubishi UFJ.
One final point, and we’re not suggesting the two are related in any way, but it’s worth noting reports that the US Treasury seems to be moving to adopt a new plan to take direct stakes in troubled banks - just as Morgan Stanley’s woes seem to be deepening, very rapidly.
