Morgan Tries to Quell Rumors About Its Holdings
Morgan Stanley executives are battling a daily barrage of speculation and nay-saying to try to stem a sharp slide in the company’s stock.
It is a war that is being fought in large part in the shadows: against anonymous blogs and market whispers, but also against undefined fears about exposure to troubled European banks. While those worries are common to all the big Wall Street banks, Morgan Stanley , as the smallest, is perhaps the most vulnerable among them.
In response, Morgan Stanley executives have been rallying employees and talking to the company’s biggest shareholders. The campaign culminated late on Monday, with the Mitsubishi UFJ Financial Group , which owns approximately 22 percent of Morgan Stanley, publicly reaffirming its support for the company.
The push may have helped on Tuesday. Shares of Morgan Stanley rose 12.4 percent, after falling nearly 29 percent since the beginning of September. Morgan and other banks were primarily buoyed on Tuesday by a suggestion that European officials would look at bank recapitalizations.
Nonetheless, there has been a bloodbath in bank stocks. Morgan Stanley is down 48.5 percent for the year; Goldman Sachs has fallen 44 percent; and Bank of America is off about 57 percent. And the cost of insuring Morgan Stanley’s debt for five years through credit-default swaps, though it eased on Tuesday, remains at levels that were seen during the financial crisis.
Morgan Stanley’s war-roomlike approach to market volatility highlights the difficulties of stamping out speculation in a world of instant, and often anonymous, information.
Its latest round of troubles began on Friday morning before the markets opened at 9:30 a.m. Zero Hedge, a well-read and controversial financial blog, linked to a Bloomberg News article that noted Morgan’s credit-default swap spreads had been widening. The Zero Hedge post also directed readers to a previous Zero Hedge article that pegged Morgan Stanley’s net exposure to French banks at $39 billion, about $12 billion more than the bank’s current market capitalization, reigniting fears about its exposure.
It was a potent cocktail of information. The company’s stock opened down more than 3 percent, prompting a flood of calls to Morgan’s investor relations and press offices.
Calling Zero Hedge for damage control was not an option. The post was written by an anonymous blogger who goes by the name of “Tyler Durden,” a character in the movie “The Fight Club,” and the Web site does not give readers a way to readily reach its writers.
Adding to Morgan Stanley’s woes, Friday was the last day of Morgan Stanley’s third quarter. The company is set to release its earnings in a few weeks, and securities laws limit what it can say about its financial condition. Unable to reach Zero Hedge, Morgan Stanley’s investor relations department went into overdrive, quickly pulling together talking points for callers that were circulated to both media and investor relations staff members.
According to the talking points, reviewed by The New York Times, the numbers cited by Zero Hedge “represent gross asset positions and thus do not reflect the benefit of collateral or other hedges and protection, and the more relevant exposure to consider is the net exposure.”
So what is its net exposure? The company was limited in what it could say because of the pending earnings announcement. To address this point, staff members were told to direct callers to pre-existing stock research. “Analysts estimate that the actual net exposure is meaningfully lower,” the talking points read.
In particular, they cited a recent report by Brad Hintz, an analyst with Sanford C. Bernstein & Company, who estimated that Morgan’s “total risk to France and its banks is less than $2 billion net of collateral and hedges.”
Zero Hedge could not be reached for comment.
Despite Morgan Stanley’s efforts, the stock ended on Friday down about 10 percent, at $13.51, its lowest close since the fall of 2008 and the depth of the financial crisis. The stock price was particularly frustrating to James P. Gorman, the company’s chief executive since early 2010. He has been leading the effort to rebuild the company; he even bought 100,000 shares of Morgan Stanley in early August at approximately $20 a share.
On Friday, Mr. Gorman shared his concerns with senior executives at Mitsubishi, conversations that culminated with discussions over the weekend between Mr. Gorman and Nobuyuki Hirano, his counterpart at the Japanese bank. The two men discussed the market rumors, concurring that they ran contrary to what they felt was going on in the market, said two people briefed on the conversation.
The company is expected to report third-quarter results in two weeks. Those results, these people said, are solid in light of the recent stock market rout. Analysts polled by Thomson Reuters estimated that the bank would report a profit of 36 cents a share.
Mr. Gorman and Mr. Hirano agreed that it would be helpful if Mitsubishi issued a news release expressing its support. That did not come, however, until Monday after the close.
Early on Monday Mr. Gorman decided to speak out himself. “In fragile markets, where fear triumphs over common sense, these things are bound to happen. It is easy to respond to the rumor of the day, but that is not usually productive,” he wrote in a note to employees. “Instead we should let balanced third parties do their own analysis and let the facts speak.”
On Monday, despite Mr. Gorman’s efforts, the company’s stock tumbled 7.7 percent.
Six minutes after the close, Mitsubishi issued its statement. “In response to recent market volatility M.U.F.G. wishes to reiterate that we are firmly committed to our long-term strategic alliance with Morgan Stanley. The special relationship we have formed remains core to our global business strategy.”
Initially, the statement seemed to have little effect on the stock. The cost to insure Morgan Stanley’s bank debt with credit-default swaps on its debt continued to rise Tuesday morning, but then fell back, according to Markit, a financial information company. Its shares closed at $14.01, up $1.54, or more than 12 percent.
“Mitsubishi’s announcement was the equivalent of a Japanese firm saying you are part of the family,” Mr. Hintz said.