Is Morgan Stanley Next?

If you go to take a look at Marketwatch.com's bond page, the answer to these question seems pretty apparent. Almost all of Morgan Stanley's bonds are yielding in the low to mid-20s. God only knows how they are going to roll over their debt and one what terms, with the market expecting those kind of yields. Furthermore, what could they possibly profitably finance with a 24% yield? Short answer: Nothing. Then there is MS's recent stock performance: down 25% today and 74% for the year, and today's action was with the short-selling ban in place! On top of all this, at least a third of the firm's hedge fund clients have deserted it. The market seems doesn't merely seem to be suggesting what's in store for Morgan Stanley; it's shouting it with a bullhorn. So how did we get here?

Morgan Stanley is one of the most strongest and respected names on Wall St, a descendant of JP Morgan's banking empire. Up until Goldman's Ascension in the 1970s, the firm was Wall St.'s undisputed reigning champion. This strength is the only reason MS is still alive today. Nevertheless, the market's seem to have spoken, independent broker dealers are to be no more. Despite it's vaunted name and it's been able to remain profitable through all of this, Morgan seems to be the next victim in line. There are four things that are ultimately bringing down MS, the same three things that brought down Merrill, Lehman and Bear: leverage, a lack of access to deposits, a mismatch between between asset duration and liability duration and most importantly.

Leverage, while at one point the darling of Wall St., has now become its undoing. During the Greenspan years of easy credit, MS loaded up on debt, like its Wall St. brethren. As of its latest earnings release, Morgan Stanley's assets to tangible equity stood at 30.6x. So, if the firm's assets were to lose around 1/33rd of their value, it's goose would be cooked. On top of that, MS relies heavily on short term debt for funding. Around 14% of the firm's assets were funded through the short-term repo markets. Also, since MS is an investment bank, it has no access to cheap, stable, long-term customer deposits. And finally, and most importantly, no one trusts them. After Lehman collapsed, it came out that they had signifcantly over-valued their commerical MBS portfolio. Who is to say that MS isn't doing the same?

While Morgan Stanley's deal with Mitsubishi Financial and their conversion to a bank holding company seemed to offer a stay of execution, all of this seems to be a bit too little too late.