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.