Morgan Stanley

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 »

  • 06 Sep 2012 at 5:41 PM

Layoffs Watch ’12: Morgan Stanley

Employees within fixed income may need to find room at another inn. Read more »

They’re not there yet, however; first, they’re going to send James Gorman a strongly worded letter about the issue and make a decision based on his response. They do sound pretty miffed though, so God help the guy if his answer is anything but “I’ve got my tool kit and I’m on the way over.” Read more »

Layoffs Watch ’12: Morgan Stanley

Morgan Stanley’s roadmap for the future involves fewer humans, more machines. Read more »

I very much enjoyed this Morgan Stanley electric shenanigans case that settled yesterday. According to the complaint, this happened:

  • KeySpan, an electric generator, realized that prices for electric generation would be going down as more capacity came online.
  • It decided to keep up prices by cutting back its own generation.
  • But that’s dumb, because then it wouldn’t be able to sell much electricity at the high prices, which would mainly benefit its competitors.
  • So it decided to buy its main competitor, cut back generation, but still sell plenty of electricity at high prices.
  • But it “concluded that its acquisition of its largest competitor would raise serious market power issues” and so would raise problems with antitrust and electric grid regulators.
  • So it said “aha, a swap!”
  • And it synthetically acquired the capacity of its largest competitor (Astoria Generating) by entering into a swap with Morgan Stanley where it effectively bought that capacity at $7.57 a kilowatt-month.
  • And Morgan Stanley hedged that trade by entering into a swap where it effectively bought the capacity from Astoria at $7.07 a kilowatt-month.
  • Attentive readers will note that that’s a $0.50 difference, so Morgan Stanley made $0.50 per kW-month for about three years, for total revenue of around $21.6mm.*

So what do you make of it? The complaint sounds terrible, but then it would, and Morgan Stanley isn’t talking (and not admitting or denying etc. etc.), so we’ve only got one side of the story and maybe it’s exaggerated. But if you believe the complaint then everyone at KeySpan and Morgan Stanley knew that they were structuring this deal to get around antitrust requirements that they knew would make it impossible for KeySpan to buy Astoria directly. That’s certainly one possibility – everyone was as criminal as criminal can be – and, yeah, sure, probably, though the relatively low-dollar-value settlement might suggest otherwise.

But I like imagining the other possibilities in which someone was taking advantage of someone else’s naïveté. Read more »