Morgan Stanley by the eerrr....Envelope
Instead of analyzing Morgan Stanley's financials by the book, I am going to do it by the back of the envelope for the following two reasons:
1) I am not trained as a financial analyst.
2) All modern financial institutions, lie... uh, rather... use "good faith" to interpret accounting "standards". These figures were gleaned from the Sep. 09 10-Q filing.
First of all, MS has about $60B cash and equity, more or less equally divided. Total liabilites are in the range of $700B, with about $300B long-term debt. The asset side of the ledger includes over $87B of debt securities and $89B of derivatives including $25B of debt securities and $9B of derivatives classified as Level 3 assets. The total debt securites show unrealized gains of $937M whiled the derivatives display an unrealized loss of $1.251B. The debt securities included $17B of CDO's with unrealized gains of $670M. The L3 assets include RMBS and CMBS securities which showed unrealized losses of $41M and $442M, respectively. Better than last year when they declined $771M and $2.23B, respectively. So far, nothing seems too far out of line, with the possible exception that an institution which is leveraged about 12:1 would not seem inherently stable, but maybe I am just old fashioned.
More interesting is some of the off balance sheet items. One notes points out that there are QSPE's (Qualified Special Purpose Entities) which have a grand total of $56B in RMBS, $111B in CMBS and $64B in US Agency securities. I don't think the US gov't is broke...yet. So that last part is probably OK, for now. But the first two items are disturbing. Especially, with the recent news that one of Morgan Stanley Commercial RE funds is facing big losses. I think that it is reasonable to assume that 30% of both the Residential and Commercial MBS in these SPE's is impaired, although they may have begun to address this already, I am skeptical. My impression is that they have taken their hits for the stuff that is consolidated on the balance sheet that they have had to do, but there is a reason the off balance sheet is off in the first place. So in a worst case scenario where they take a 30% hit, $18B would be gone from RMBS and $34 from CMBS, leaving Morgan Stanley with $10B against $550B of liabilites. Or leverage of 55:1.
Also, they have an astonishing $21T, yes, Trillion notional value of derivative hedges in places. The fair market value is just over $1T. While this is hedged and theoretically would involve offsetting positions, $980B of this market value is said to be counterparty netting. I think this indicates why last Fall, financial authorities were basically panicked about systemic failure. With this kind of counterparty risk at one single company, the contagion effects of the failure of one significant player could easily be disastrous, as it would be difficult even for such a profligate printer such as Ben Bernanke to plug a $980B hole in short order, before it rippled through the global system.
I believe that we may see such a ripple next year due to CMBS. And Morgan Stanley may be at the heart of it.
1) I am not trained as a financial analyst.
2) All modern financial institutions, lie... uh, rather... use "good faith" to interpret accounting "standards". These figures were gleaned from the Sep. 09 10-Q filing.
First of all, MS has about $60B cash and equity, more or less equally divided. Total liabilites are in the range of $700B, with about $300B long-term debt. The asset side of the ledger includes over $87B of debt securities and $89B of derivatives including $25B of debt securities and $9B of derivatives classified as Level 3 assets. The total debt securites show unrealized gains of $937M whiled the derivatives display an unrealized loss of $1.251B. The debt securities included $17B of CDO's with unrealized gains of $670M. The L3 assets include RMBS and CMBS securities which showed unrealized losses of $41M and $442M, respectively. Better than last year when they declined $771M and $2.23B, respectively. So far, nothing seems too far out of line, with the possible exception that an institution which is leveraged about 12:1 would not seem inherently stable, but maybe I am just old fashioned.
More interesting is some of the off balance sheet items. One notes points out that there are QSPE's (Qualified Special Purpose Entities) which have a grand total of $56B in RMBS, $111B in CMBS and $64B in US Agency securities. I don't think the US gov't is broke...yet. So that last part is probably OK, for now. But the first two items are disturbing. Especially, with the recent news that one of Morgan Stanley Commercial RE funds is facing big losses. I think that it is reasonable to assume that 30% of both the Residential and Commercial MBS in these SPE's is impaired, although they may have begun to address this already, I am skeptical. My impression is that they have taken their hits for the stuff that is consolidated on the balance sheet that they have had to do, but there is a reason the off balance sheet is off in the first place. So in a worst case scenario where they take a 30% hit, $18B would be gone from RMBS and $34 from CMBS, leaving Morgan Stanley with $10B against $550B of liabilites. Or leverage of 55:1.
Also, they have an astonishing $21T, yes, Trillion notional value of derivative hedges in places. The fair market value is just over $1T. While this is hedged and theoretically would involve offsetting positions, $980B of this market value is said to be counterparty netting. I think this indicates why last Fall, financial authorities were basically panicked about systemic failure. With this kind of counterparty risk at one single company, the contagion effects of the failure of one significant player could easily be disastrous, as it would be difficult even for such a profligate printer such as Ben Bernanke to plug a $980B hole in short order, before it rippled through the global system.
I believe that we may see such a ripple next year due to CMBS. And Morgan Stanley may be at the heart of it.
posted by Matt Butler at 8:37 PM
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