May 22, 2009 – 2:23 pm


Morgan Stanley prospered in the credit bubble by peddling all manner of subprime snake oil and toxic contagion to all creatures of lesser credit rating. Then the bubble burst like a chameleon and Morgan Stanley changed its colors to become a plain old bank. Fortunately, the bank can’t hide the red as it bled nearly $2 billion in write-downs and lost nearly $200 million after posting worse-than-expected results.
– Morgan Stanley reported a bigger- than-estimated $177 million loss and slashed its dividend to 5 cents as real estate and debt-related writedowns overwhelmed trading gains. The shares fell 9 percent.
The first-quarter loss was 57 cents a share, New York-based Morgan Stanley said today in a statement. The average estimate of 19 analysts surveyed by Bloomberg was for a loss of 8 cents. The company also had a loss of $1.3 billion in December before the start of its new fiscal year.
“The only thing that was good was investment banking, frankly everything else was weak,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who once served as Morgan Stanley’s treasurer. “I’m disappointed.”
Little bit of sour grapes there, Brad? That’s okay we’ll give it to you, this time. Brad is right about that. In a quarter where the other big boyz on the block used one-time trading gains to overwhelm the stench of their longtime business prospects, Morgan Stanley’s trading gains were themselves overwhelmed. Bad Omen!
Morgan Stanley’s $2 billion of write-downs came on financial securities and an improvement in the firm’s commercial paper. According to page 85 of the 10-Q:

The results during the quarter ended March 31, 2009 also included writedowns of securities of approximately $0.2 billion in the Company’s Subsidiary Banks,

And in the “can’t win for losing” category, we have this:

The company had $1 billion of real-estate losses in the first quarter and writedowns of $1.5 billion from an accounting loss related to an improvement in the firm’s creditworthiness compared with Treasury bonds.

The $1.5 billion loss reflects the gaming that goes on under SFAS 157. Suppose the company sold a bond with a face value of $1000, but because of the deteriorating condition of its credit worthiness, that bond is worth only $700 on the secondary market. The rule lets a Morgan Stanley book the $300 difference as a profit (not making this up, swear it), but when the bond recovers, that booked a profit has to come off the book.
That the practice barely raises an eyebrow anymore, speaks volumes about what we’ve come to accept and expect in accounting principles. If they would have just stopped, may be it wouldn’t be so bad, but then there’s as always the level 3 assets scam, which lets the bank assign arbitrary values to garbage that nobody will buy. In other words, the market calls it valueless, but the bank says it’s worth a fortune. From page 97 of the 10-Q, Morgan Stanley lists about $67.4 billion as level 3, as of March 31, 2009. Witness:
The Company’s Level 3 assets before the impact of cash collateral and counterparty netting across the levels of the fair value hierarchy were $67.4 billion, as of March 31, 2009,
The new accounting principles regarding level 3 assets give the bank wide latitude in valuing its own balance sheet items, even though the market declares them worthless. But to sell or remove them from level 3, they must hit a bid in the market. Now you know how important the appearance of an economic recovery is to a big bank with a damaged balance sheet. In other words, now you know what the current stock market rally is all about: raising the bid. Witness:

During the quarter ended March 31, 2009, the Company reclassified approximately $2.3 billion of certain Corporate and other debt from Level 2 to Level 3. The reclassifications were primarily related to asset-backed securities and certain corporate loans. The reclassifications were due to a reduction in market price quotations for these or comparable instruments, or a lack of available broker quotes, such that unobservable inputs had to be utilized for the fair value measurement of these instruments.

The most unobservable input were the buyers, but you can observe the trend, as the value decreases, the assets are transferred into level 3.

These unobservable inputs include, depending upon the position, assumptions to establish comparability to bonds, loans or swaps with observable price/spread levels, default recovery rates, forecasted credit losses and prepayment rates. During the quarter ended March 31, 2009, the Company reclassified approximately $2.7 billion of certain Corporate and other debt from Level 3 to Level 2.

As the value of the assets increases, they are transferred out of level 3. So, the more worthless the crap is, the closer to level 3 it gets. In other words, as the value sinks, level 3 rises.  Currently it has risen to $67.4 billion.
Morgan Stanley did not raise any cash for the quarter that we could find, but its dividend slash will save about $1 billion a year, according to CFO Cohm Kelleher. The move isn’t much, but it is the best that a broke bank can do. Don’t tell poor Brad. He still can’t get over himself. Take a look:

Hintz questioned the decision to cut the dividend, which he said is the main source of cash flow for many of the firm’s employees whose net worth is tied up in restricted stock.

Talent Drain

“When you cut the dividend you are cutting out the cash that these guys are using to live on in what is arguably a downturn in the industry,” he said. “Are you trying to lose talent out of your company?”

Yeah, well, you might want to drain the talent that sunk your ship. We noticed that you’re a goner these days, Brad. Along with cost cutting, Morgan Stanley is pulling in its horns on the revenue front, preferring to sit safely on its trading gains instead of risking the credit markets.

Morgan Stanley’s fixed-income revenue of $1.3 billion was less than one-fifth of Goldman Sachs’s $6.56 billion in the quarter and less than Citigroup’s $4.69 billion and JPMorgan’s $4.9 billion. Morgan Stanley’s fixed-income revenue included $1 billion of write downs on credit spreads while Citigroup’s included $2.5 billion of gains on credit spreads.

“It is about risk appetite,” Kelleher said on a conference call with analysts, adding that the firm was more cautious about taking advantage of market “opportunities.” Still, he said the firm gained market share in fixed-income markets.

But of course Brad sees things differently…

‘Well-Thrown Ball’

“I don’t see how you could be gaining market share if you’re pulling in all your customer financing like they are,” Bernstein’s Hintz said. “Effectively they let a perfectly well- thrown ball just zoom right by them.”

Well, of course you don’t Brad. But it’s like this: they don’t want an increasing share of a decreasing, soon-to-be-deceased market any more than they want you as treasurer, Brad. Instead, Morgan Stanley sticks to the risk-free markets, gaining share in the “hand out to banks” market or TLGP.

As of March 31, 2009, the Company had commercial paper and long-term debt outstanding of $1.0 billion and $23.7 billion, respectively, under the TLGP. As of December 31, 2008, the Company had commercial paper and long-term debt outstanding of $6.4 billion and $9.8 billion, respectively, under the TLGP. These borrowings are senior unsecured debt obligations of the Company and guaranteed by the FDIC under the TLGP. The FDIC has concluded that the guarantee is backed by the full faith and credit of the U.S. government.

So there it is. Going forward in ever more changeling markets, Morgan Stanley will generate profits by stealthy capital raising, thus again gutting the over-stuck taxpayer via some alphabet soup concocted by the FED or Treasury or other. Morgan Stanley may have changed its colors like a chameleon, but to the US taxpayer, the bank is more like a hissing snake coiled in the grass.