Morgan Stanley

Back in December 2007, things weren’t going so well for Matthew Marshall Taylor. He’d just been fired from Goldman Sachs and not only was he out of a job, but his prospects for finding a new one didn’t look so hot, on account of the fact that Goldman planned to put a note in his file detailing the reason he’d been let go– “for building an ‘inappropriately large’ proprietary trading position”– and it seemed unlikely anyone at the firm would be open to serving as a reference for him moving forward.  Three months later, however, one bank told MMT that there was room for him at their inn. Morgan Stanley, apparently having decided the incident at Goldman was but an asterisk in what would be a long and fruitful career, told Taylor to come on down, employing him for over four years until he left in July of his own accord and not because of any legal issues relating to his work at Goldman Sachs. Read more »

  • 18 Oct 2012 at 1:15 PM
  • Banks

Morgan Stanley Now 23% Safer

A value-at-risk model basically works like this. You have some stuff, which is worth X today. Tomorrow it will be worth X + Y, where Y ranges from more or less negative infinity to positive infinity. Y is a function of a bunch of correlated random variables, rates and credit and stock prices and general whatnot. You look at a distribution of moves in those variables and take (usually) a 2-standard deviation daily move; if 95% of the time rates move by -10 to +10 basis points, your VaR model will assume a -10bp or +10bp move, whichever is bad for you. You take the 95%-worst-case, taking into account correlation etc., and tot up how much you’d lose in that case. Then you write that number down and feel a bit better, since you’ve sort of implicitly replaced “we have $X today and will have some number between negative and positive infinity tomorrow” with “we have $X today and will have some number between ($X – VaR) and positive infinity tomorrow,” though of course the first statement is true but unhelpful and the second is not true and also unhelpful.

But that aside! You get your VaR from a distribution of your variables, but the obvious question is what distribution. A good answer would be like “the distribution of those variables over the next three months,” say, for quarterly reporting, but of course that is only a good answer because it begs the question; if you knew what would happen over the next three months you would, one assume, always end those three months with more than $X and this VaR thing would be moot or moot-ish.1

So instead you look at things that you think will allow you to predict that future distribution as accurately as possible, which is epistemically troubling since VaR is a measure of how inaccurate your predictions might turn out to be. Anyway! You pick a distribution of variables based on the sort of stuff that you always use to estimate future distributions in your future-distribution-estimating business, which could mean distributions implied by market prices (e.g. option implied vol) but which seems to mostly mean historical distributions. You look at the last N days of data and assume that the world will be similarly distributed in the following M days, because really what else is there to do.

Picking the number of days to use is hard because, one, this is in some strict sense a nonsense endeavor, but also two, the world changes over time, so looking back one year is for instance rather different from looking back four years. Here is how different: Read more »

The criminal case against a former Morgan Stanley executive charged with stabbing a cab driver following a fare dispute was dropped Monday after a Connecticut state’s attorney revealed that the driver never turned the knife over to police. The driver, Mohamed Ammar, “had the knife the whole time,” said supervisory assistant state’s attorney Steven Weiss. “He had ample opportunity to tell police and he didn’t do that.” [...] Weiss emphasized that Jennings didn’t immediately call police and described him as uncooperative. But he said Ammar couldn’t adequately explain why he never gave the knife to investigators, even after an interview and a search of his cab. “I simply can’t go forward when I have a witness who didn’t cooperate with police,” Weiss said of Ammar. Jennings attended the brief hearing and thanked his family and attorney. “Obviously it feels good,” he said outside court. [WSJ, earlier]

Buried in a footnote1 a while back I ruminated on the fact that, in the deal where Morgan Stanley bought a chunk of its Morgan Stanley Smith Barney brokerage JV from Citigroup, Morgan Stanley got a sort-of-free option to buy the rest of Smith Barney, and how that option is (1) valuable and (2) sort of cheap funding. That was basically all wrong, sorry! The lesson is, never read footnotes.

Charlie Gasparino is reporting that “Morgan Stanley chief James Gorman is making a full-court press with regulators to expedite the purchase of the remaining piece of the Smith Barney brokerage firm from Citigroup, moving up the buyout date as much as two years ahead of schedule,” so I guess Gorman puts the time value of that option at zero or less. As for cheap funding, Goldman had a research note this week saying that they met with Morgan Stanley and heard the same story, and also that:

At the margin, full MSSB ownership should have a meaningful impact on ROE as: 1) MS is still paying Citigroup a portion of earnings from the JV despite holding capital to support the entire business, 2) synergies with the Institutional Securities business will grow (i.e. client flow routing), and 3) the funding profile and client product offering mix will improve.

I think the second two things say something like “Citi won’t appreciate us shoving all of our MSSB customers into high-margin Morgan Stanley products, so we have to get rid of them before doing that,” though you could read them otherwise. The first thing calls the cheap-funding argument into some doubt, though maybe not that much doubt; Morgan Stanley’s capital is by some metrics cheaper than Citi’s, while its (credit market) funding is more expensive, so maybe this is still a good deal.

Anyway here’s what Gasparino has to say about the delay: Read more »

Bloomberg has a story today about how, while one side of Morgan Stanley made lots of money on the Facebook IPO in fees and greenshoe trading profits, another side of it did not do so well. So: how much of the subtext here is actually here?

Morgan Stanley, the underwriter that took Facebook Inc. public at a record high market value, said its own money-management unit bought more than 2 percent of the shares sold through the $16 billion offering.

Morgan Stanley Investment Management invested about $380 million in Facebook’s initial public offering, according to regulatory filings late last month, the first to show its IPO purchases. A dozen funds run by the advisory unit’s growth team, headed by Dennis Lynch, each allocated 6.8 percent of their net assets to buying Facebook stock at the IPO price of $38 a share.

Facebook has fallen 42 percent since its offering, increased in size and price at the 11th hour. The drop erased $39 billion in market capitalization, ranking the stock as the worst-performing large technology IPO ever based on the early loss in value, according to data compiled by Bloomberg. The decline crimped the performance of Lynch’s growth team, described as a “crown jewel” of Morgan Stanley Investment Management, and left the bank’s fund investors behind on the investment.

This is a form of story that is not uncommon and a lot of the accompanying eyebrow-raising is usually unjustified. Still, we’ve got eyebrows, let’s use them. Like: Read more »

Here’s an interesting set of slides that Morgan Stanley CFO Ruth Porat presented at the Barclays conference today. For some reason this one struck me:

Morgan Stanley: basically a mutual fund! Half a mutual fund. Really barely at all an investment bank, which I guess is the way of the world for investment banks, but still sort of stark to see it there in black and white, er, navy and yellow. And Morgan Stanley will be shifting even more toward wealth/asset managing after today’s hotly negotiated purchase of Morgan Stanley Smith Barney.1 As Reuters puts it: Read more »