Bloomberg News

Morgan Stanley Swaps Risk May Be Misread, Wells Fargo Says

October 03, 2011

(Updates share performance in the fourth paragraph.)

Oct. 3 (Bloomberg) -- Morgan Stanley’s derivatives holdings may have been misread by markets and investors, prompting the bank to plunge more than 10 percent on Sept. 30, a Wells Fargo & Co. analyst wrote in a report.

Concern about Morgan Stanley “appears to be driven” by confusion over a U.S. government report that said the company had $1.78 trillion of outstanding notional value of derivatives in the second quarter, Wells Fargo’s Matthew Burnell wrote Sept. 30. In reality, so-called netting agreements outlined in the Office of the Comptroller of the Currency report mean Morgan Stanley’s derivatives positions totaled $457 million, according to Burnell.

“Net credit exposure is well below its peer group,” Burnell, who has a “market perform” rating on Morgan Stanley shares, told clients.

Morgan Stanley fell 1 cent, or 0.1 percent, to $13.50 at 11 a.m. in New York Stock Exchange Composite trading, after climbing as much as 4 percent earlier today. The stock has dropped 50 percent this year before today.

The cost of buying credit-default swaps on Morgan Stanley, which offer investors protection against a default by the New York-based bank, rose to a mid-price of 515 basis points as of 10:28 a.m., according to broker Phoenix Partners Group. The price of insurance on Morgan Stanley is higher than Italian banks Intesa Sanpaolo SpA and UniCredit SpA and means investors have to pay $515,000 a year for every $10 million of debt they are protecting, according to data compiled by Bloomberg.

U.S. Aid

The firm, which owns the world’s biggest retail brokerage, was the largest recipient of emergency loans from the Federal Reserve during the financial crisis and also benefited from capital provided by Tokyo-based Mitsubishi UFJ Financial Group Inc., now the biggest shareholder, and the U.S. Treasury, which it repaid with interest less than a year later.

The largest Wall Street firms will start reporting third- quarter results this month showing how they performed in a market grappling with fallout from Standard & Poor’s downgrade of the U.S. credit rating and concern Greece would default. JPMorgan Chase & Co. and Morgan Stanley warned investors in September trading revenue may suffer.

--With assistance from Christine Harper, Shannon D. Harrington and Michael J. Moore in New York. Editors: Steve Bailey, Steve Dickson

To contact the reporters on this story: Jesse Westbrook in ?? at; Ambereen Choudhury in London at

To contact the editor responsible for this story: Edward Evans at

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