http://globaleconomicanalysis.blogspot.com/2012/06/morgan-stanley-bonds-trade-at-junk.html
"The numbers have changed for the worse," said Otis Casey, director of credit research at Markit. "What has driven that, obviously, is Europe. The perception is – correctly or incorrectly – that Morgan Stanley is one of the U.S. banks most exposed to Europe’s problems."
Morgan Stanley’s problems were compounded by its handling of the Facebook IPO – its high price and large size, and selective disclosure of an analyst’s reduction of his forecasts for the social network’s revenue and earnings. Facebook shares ended regular trading at $27.72 on Friday, down 27 percent from their offering price of $38.
"A bank with a near-junk rating is in ‘no man’s land,’" said Edward Marrinan, credit strategist at Royal Bank of Scotland Group in Greenwich, Connecticut. "Banks rarely thrive with non- or borderline investment grade ratings."
My answer is the same as I said about Citigroup in 2007: Not in one piece. And in spite of shedding numerous pieces over the years, Citigroup and others still have shedding to do.
JP Morgan added fat to the fire with massive derivatives losses, bringing the Volcker Rule back in the spotlight.
Top 5 Banks Have 45 Times Leverage
Reuters reports JPMorgan case puts Volcker Rule and SIFIs back in the spotlight
Saturday, June 02, 2012 2:22 AM
Morgan Stanley Bonds Trade at Junk Pricing, Downgrades Coming; Will Morgan Stanley Survive? Top 5 Banks Collectively Have 45:1 Leverage
Morgan Stanley's corporate borrowing costs are already way higher than Goldman Sachs and more downgrades are likely in the works.
The Fiscal Times explains How Morgan Stanley sank to junk pricing
The Fiscal Times explains How Morgan Stanley sank to junk pricing
The bond markets are treating Morgan Stanley like a junk-rated company, and the investment bank’s higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade this month.
Bond rating agency Moody’s Investors Service has said it may cut Morgan Stanley by at least two notches in June, to just two or three steps above junk status. Many investors see such a cut as all but certain.Even before any downgrade, the bank is suffering in the bond markets. Prices for Morgan Stanley’s bonds and credit derivatives have been trading at junk levels since last summer, according to Moody’s Analytics. Prices moved further into the non-investment-grade category over the past two weeks amid troubles in Greece and other Euro zone nations.
"The numbers have changed for the worse," said Otis Casey, director of credit research at Markit. "What has driven that, obviously, is Europe. The perception is – correctly or incorrectly – that Morgan Stanley is one of the U.S. banks most exposed to Europe’s problems."
Morgan Stanley’s problems were compounded by its handling of the Facebook IPO – its high price and large size, and selective disclosure of an analyst’s reduction of his forecasts for the social network’s revenue and earnings. Facebook shares ended regular trading at $27.72 on Friday, down 27 percent from their offering price of $38.
"A bank with a near-junk rating is in ‘no man’s land,’" said Edward Marrinan, credit strategist at Royal Bank of Scotland Group in Greenwich, Connecticut. "Banks rarely thrive with non- or borderline investment grade ratings."
In a May 7 securities filing, Morgan Stanley said it might have to post $7.2 billion worth of additional collateral and termination payments in the event of a downgrade to Baa2, the second lowest investment-grade rating, up from a $6.5 billion estimate it provided three months earlier.Will Morgan Stanley Survive?
But bond markets are not waiting for a downgrade. On Friday, it would have cost Morgan Stanley 1.20 percentage points more to raise five-year debt than its chief rival, Goldman Sachs Group Inc. The bank would even have to pay a little more than much-smaller competitor Jefferies Group.
"The Street is pretty efficient and is really moving ahead of the ratings agencies," said Carret Asset Management’s Graybill. "It’s never good in this business to have a disadvantage against a strong competitor."
My answer is the same as I said about Citigroup in 2007: Not in one piece. And in spite of shedding numerous pieces over the years, Citigroup and others still have shedding to do.
JP Morgan added fat to the fire with massive derivatives losses, bringing the Volcker Rule back in the spotlight.
Top 5 Banks Have 45 Times Leverage
Reuters reports JPMorgan case puts Volcker Rule and SIFIs back in the spotlight
The massive losses which resulted from JPMorgan Chase hedging its positions against derivatives has once again cast the spotlight on the Volcker Rule and whether systemically important financial institutions (SIFIs) are too big to fail, industry observers said. Questions have also been raised about the firm’s hedging strategy, and what constitutes hedging in the first place.
Industry officials in Asia suggested that JPMorgan’s $2 billion hedging losses might embolden regulators to strengthen the Volcker Rule, on the premise that it would be of benefit to SIFIs. The rule, named after former Federal Reserve chairman Paul Volcker, forms part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and has proposed the separation of proprietary trading from commercial banking activity. Most notably, it has argued against investing in derivatives or using derivatives as a hedge on investments. The rule has, however, faced strong opposition from many of the large global financial institutions.
Top five SIFIs’ OTC derivatives exposures
A look at the 2011 fourth quarter bank trading and derivatives activities report released by the U.S. Office of the Comptroller of the Currency (OCC) showed that the top five SIFIs — Bank of America, Citibank, Goldman Sachs, HSBC and JPMorgan — collectively accounted for more than 50 percent of the $700 trillion OTC derivatives trades worldwide in total notional value. JPMorgan alone accounted for more than $70 trillion of the $700 trillion, the report said. “That [$70 trillion] represents one-tenth of the global OTC derivatives exposures. This is what I call concentration of risk and what is defined as an institution that is too big to fail,” an industry official told Thomson Reuters on condition of anonymity.
The official said he found it alarming that, when the top five banks’ assets and total exposures to derivatives activities were added up, they showed a leverage of one to 45 times. The OCC report showed that JPMorgan Chase North America has total assets of $1.8 trillion to cover $70 trillion worth of OTC derivatives exposure. JPMorgan Chase & Co has total assets of $2.26 trillion, the report also stated.
“Five to 10 years ago, a leverage of one to 10 times was considered scary but now we are talking about a leverage of one to 45 times. The questions to ask JPMorgan are: ‘Were you using these derivatives for speculation or for hedging purposes?’ and ‘Can you qualify your definition of hedging?’” he said.
If regulators get really serious about enforcing the Volcker rule, none if the top financial institutions will survive in one piece.
Actually, they will all breakup regardless. At some point, the derivatives time-bomb will go off taking care of matters so to speak.
Actually, they will all breakup regardless. At some point, the derivatives time-bomb will go off taking care of matters so to speak.
and apart from the derivative issue , the other major driver hitting banks like Morgan Stanley is the lack of quality collateral......
http://www.forbes.com/sites/robertlenzner/2012/06/01/the-financial-system-is-running-out-of-quality-collateral/?partner=yahoofeed
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6/01/2012 @ 6:02PM |1,332 views
The Financial System Is Running Out of Quality Collateral
Worry about the global economic slowdown and tumbling stock prices. Then, worry about the scarcity of the highest quality collateral( US, German, Swiss government securities) and the rising cost of finding them– and the resulting handcuffs being placed on monetary policy in helping financial institutions to provide credit.
Give credit to Bob Smith, founder of Smith Capital, a New York-based fixed-income investment manager, who has been right on the mark all year about predicting deflation– not inflation– and as a result his institutional acconts– are up 7%-8% so far. It is Smith who has been giving me a gritty tutorial about the threat to the banking system of the dire collateral shortage. He called me this afternoon to underscore just how dangerous this murky area of finance is becoming.
Yes, the rush to safety has pusheed the 10 year Treasury yield in the US to 1.47%– an alltime record low. In Germany the return is only 1.20%, hardly enough to buy lunch for the bankers. The Swiss 2 year note has a negative yield; you pay the Swiss to hold their paper. This development signals just how frightened investors round the world are today– as Europe seems primed to experience a painful deterioration in its economy anbd financial markets.
Another pressure point on bank profits is the haircut they must take on collateral they utlize to do their business. You used to be able to borrow 99.5% on the face value of Treasuries. Now you can only get 91 or 92% of face value. On corporates you used to get 95% of the value as collateral; now you only get 75%. And no one’s willing to utlize the huge volume of securities from Fannie Mae or Freddie Mac as collateral anymore.
No one is taking Greek paper, and I’d bet the ban will be extended to Spanish and Italian debt. Who knows what it’s worth. In fact, Smith tells me the threat of the rating agencies’ downgrade of Spanish banks is driving up the cost of collateral in Spain by a multiple of 3x to 4x. Smith’s conclusion; as collateral becomes scarce and the cost of using it rises arithmetically– the earnings at most banks will decline. D espite the low cost of money, obtaining collateral for use is becoming hugely expensive. The flight to quality costs money.
That rising cost together with the shortage of safe bonds means the extension of crdit must naturally be reduced. And the banks’ ability to play the interest rate curve to build capital will be reduced as well, stresses Smith.
Should Morgan Stanley‘s credit rating be reduced, it will require the firm to immediately raise $2 billion to $10 billion more collateral, Smith feels. That’s why the firm is trying to move its $52 trillion nominal value in derivative transactions to its own bank– in order to get it off the investment bank’s balance sheet.
In the UK British banks have leveraged security positions that amount in monetary terms to 48% of the entire GDP of the UK. Should their credit ratings be lowered, the banks will face the precarious necessity of upgrading the collateral they are using.
Lastly, the shortage of collateral impacts the whole rehypothecation of securities in the global banking system, where collateral is used in one transaction like a repo or a swap, and then reused again for yet another transaction. This daisy chain– invisible to the markets and the public– could also be negatively affected by the shortage of high quality, highly rated securities in the world.
Today, Morris Offitt of Offitt Capital, another fixed income investment manager, put out a memorandum underscoring the difficulty of obtaining US Treasury securities despite the increase in their issuance the last 4 years to $15 trillion. Investors trying to safe keep their capital, are scouring the world for US government securities. It is the most fantastic phenomenon in a dangerous world...
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