Morgan Stanley takes $9.4 bln mortgage writedown, sells stake to China
Posted by: in Latest NewsFiled under: Major movement, International markets, Deals, China, Morgan Stanley (MS), Economic data, Federal Reserve
The subprime write-down/Sovereign Wealth Fund (SWF) — government investment funds totaling $2 trillion to $15 trillion — duet continues. This is the new dance invented in the last month in which a U.S. pillar bank writes down billions in bad subprime mortgage-related investments while selling a big chunk of itself to another country whose economic and political interests are not aligned with ours.
Today, according to The Associated Press, Morgan Stanley (NYSE: MS) was the latest to step on the subprime/SWF dance floor. It is writing off $9.4 billion worth of mortgage-related investments and accepting a $5 billion investment from China Investment Corp. one of several SWFs that have been swooping into the U.S. financial system to rescue the U.S. from the Greenspan-backed subprime securitization disaster. Morgan Stanley’s write-off cost former President Zoe Cruz her job and CEO John Mack his bonus.
As I posted last week, the subprime writedown/SWF dance isn’t new. In my view, it makes sense to mark the toxic waste to market and to raise capital at the same time. But with the European Central Bank (ECB) pouring $500 billion into the global banking system and Alan Greenspan suggesting the U.S. pay subprime borrowers to bail them out of their bad loans, the question is whether throwing so much cash into the system will really restore bank’s confidence to lend — in particular to each other.
To restore such confidence, banks need clear answers to two questions: Have banks gotten to the bottom of their write-downs? If so, will they have adequate capital to keep lending? There might not be a bank on the planet that can answer these questions with certainty.
In my view, global governments’ extreme measures don’t clearly help with these two questions. Instead, they’re signaling to investors just how scared regulators are. And it’s pretty clear that while nobody knows how deep the problems are right now. These efforts to pour more money into the financial system have not been used since the 1930s and nobody particularly wants to go back to that future.
Meanwhile, Morgan Stanley is now partially owned by the Chinese government. I don’t know the terms of the investment, but I wonder whether this stake could influence U.S. government policy towards China. For example, the Treasury has been pushing China — ineffectively — to let its currency fall and to back off on taking over Taiwan.
I think it reflects the ideological rigidity of this administration that it’s better to let an economic and political competitor own the U.S. financial system rather than for the U.S. government to provide capital. Meanwhile, I still don’t know whether Morgan Stanley has gotten to the bottom of its write-downs or whether it has adequate capital.
What do you think?
Peter Cohan is President of Peter S. Cohan & Associates. He also instructs management at Babson College and edits The Cohan Letter. He has no financial interest in Morgan Stanley.
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