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When Hedgies Attack: Morgan Stanley Drops 40% on Rumors

by: Trader Mark October 07, 2008 | about stocks: C / MS    
Trader Mark

Trader Mark

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Man, these guys are relentless - I guess in a bid to stay in business they will do anything... because you can't stop a good rumor (shouting fire in a movie theater?). Remember, short selling for financials comes back Thursday, so that should be interesting to see what happens - but put buying and credit default swap buying? Priceless! Morgan Stanley (MS) is now down "only" 24% after hastily putting out a press release saying: Our cash infusion from Mitsubishi Financial Group is "imminent". Oh well, they'll find something new to attack it with soon - get those thinking hats on, guys - we've got a whole slew of targets to play with again in two days.

The way things are going, these hedge funds are going to cause the golden goose to break and we could see them regulated much like mutual funds are now. We'll see - depends on how far they take this. (Comments in italics are mine.)

  • Morgan Stanley said on Tuesday its deal to sell up to 24.9 percent of its voting shares to Japanese bank Mitsubishi UFJ Financial Group was on track to close "imminently", sending its shares rebounding from earlier lows.
  • "The transaction is expected to close imminently, upon expiration of the Federal Reserve five day post-approval waiting period," Morgan Stanley spokesman Mark Lake said.
  • Earlier the shares had been down as much as 40 percent on speculation that Mitsubishi UFJ could withdraw from the deal. (Yes, I wonder where this "speculation" came from.)

Only 17 more points to go on Morgan Stanley (MS) before every taxpayer becomes a part owner. I am just waiting for the attack on Citigroup (C) - since it's the biggest whale out there.

The casino continues.


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This article has 20 comments:

  •  
    Oct 07 05:48 PM
    Given all the crazy stuff we've seen in financials this year, I can't believe people are still attacking short sellers. Christ, when companies are regularly taking multi-billion losses, their stocks are bound to go down! THESE STOCKS ARE DECLINING ON THE TRUTH, NOT RUMORS!!!
    Reply
  •  
    Oct 07 05:54 PM
    Sad part is that the hedgies have made millions of investors lose faith in the market. Valuations no longer matter, it's no longer investing. Investors have pulled in their reins and what we have left is a market that is collapsing. They have destroyed American capitalism.

    You mention "casino", but I believe the odds are better in casinos, at least the casinos aren't cheating you.
    Reply
  •  
    Oct 07 05:56 PM
    If shorts can take you out, you need to be taken out.

    You also left out the foundational info on CEO Mack.

    <blockquote>The SEC gave "preferential treatment" to Wall Street executive John Mack during an insider trading investigation three years ago because Mack was about to become CEO of the Morgan Stanley investment banking firm, the SEC's inspector general concluded in a report obtained by ABC News. </blockquote>

    The Japanese may not want in on this scandal in the making.
    Reply
  •  
    Oct 07 05:57 PM
    wallstreetto has a point, many financials are going down under their own weight, but the article is referring to hedgies attacking stocks through false rumors, so if you believe that it's a level playing field then you are just plain naive.
    Reply
  •  
    Oct 07 06:00 PM
    Problem is ........ the rumors ARE KILLING THE MARKET! Billions lost Billions infused by the government (TAXPAYER). Every analyst with a company is doing the same ...... downgrade the stock ...... open door for more declines of the melting (MELTED) pot in America! Goldman S(u)chs downgrades most solar and solar melts and BURNS! king george iii bush and the admenustration has no controls because the republican party does not believe in regulation .... anywhere! When you vote............ think about THIS!!!!!!
    Reply
  •  
    Oct 07 06:07 PM
    Solid companies, with strong balance sheets, who have not given away shareholder value, for years, to overpaid executives, might go down marginally, if the rumors were placed smartly enough, but would quickly spring back. Rumor factories cannot bring down a well-capitalized bank, but can destroy banks which are lying about the value of their assets. Frankly speaking, if a company can be destroyed by mere rumor, it is not a viable company, and should be disbanded.
    Reply
  •  
    Oct 07 06:15 PM
    How do CDS's and puts affect the stock price 1.5 weeks before options expiration?
    Reply
  •  
    Oct 07 07:00 PM
    How can this guy call himself a trader? He's got no clue. Apparently he's only ever seen a bull market and has no idea what happens in a bear market. Next he'll be saying that people should be forced to buy and hold shares whether they want to or not. Oh sorry, that's already happening...
    Reply
  •  
    Oct 07 07:13 PM
    last I checked MS is one those companies that can't be shorted. So you can't blame shorts for today's sell down.
    Reply
  •  
    Oct 07 07:49 PM
    is shorting positions Fund B is known to be long on. I hope they feed on each other until they collapse into a wirling black hole and disappear into deep space.

    Too much money and too little enforcement of regulations!
    Reply
  •  
    Oct 07 07:50 PM
    oops don't know what happened to the first part.
    Reply
  •  
    Oct 07 07:50 PM
    Just for all those conspiracy theorists, CDS markets in MS were pretty much frozen this afternoon. There was no rush to buy protection, there was no massive entrant(s) into the market ahead or after the rumor, there was simply no trading (some indicative levels) but no major trading. Noone is willing to sell protection and thopse that are are not good enough quality to encourage buyers to act...sorry guys, this one is simple, who would want to own a highly leveraged, low quality balance sheet entity whose business model faces significant (understatement) headwinds...and on a day when the CDS market begins to look seriously at a buy-side driven trading and clearing platform. Dealers in general can expect margins to drop significantly (that is why they have been so vociferous over defending the opacity of OTC markets - coz they get the flows and the margins). Sorry to go on - but this whining/blaming CDS for the current situation just shows the level of general ignorance among both retail and professional investors when it comes to financials and credit markets.
    Reply
  •  
    Oct 07 07:51 PM
    must have went into the black hole with the hedgies!
    Reply
  •  
    Oct 07 08:52 PM
    CreditTrader, Dinallo testified that 90% of CDS are not backed by an insurable interest. They are strictly for speculation. CDS is the only form of insurance where an insurable interest is not required.

    As Dinallo noted, buying CDS protection without owning the referenced bonds is equivalent to naked short-selling of the bond. Not good.

    The credit crises will end when CDS is properly regulated as insurance.
    Reply
  •  
    Oct 07 08:57 PM
    I thought they extended ban on shorting financials for like a year or something.....
    Reply
  •  
    Oct 07 09:15 PM
    Yes, let's see how wonderful life is without Morgan Stanley to kick around. There'll be nothing left but bulge firms and specialists without balance sheet...what are "conservative&quo... fixed income institutional funds going to do?

    I don't understand how a company like SLM, for example, or even CIT for another, aren't in the same boat. Seriously. They are all in the same friggin boat. They are dependent on short-term credit and funding sources not always of their first choosing.
    Reply
  •  
    Oct 08 01:41 AM
    Dear TomArmistead, a) what makes you think Dinallo knows anything about CDS markets, b) what has his comments got to do with my comments on the action today in MS CDS markets and the LACK of directional flow, c) what about short-sellers?, d) what about put buyers? and e) I GUARANTEE you that if and when we regulate CDS trading (which could mean many things from a clearing house to insurance) that the credit crisis will not be over, house prices will not rise, and stocks will still fall.

    Moreover, if you understood the nature of CDS markets (NOT CDO, or ABS CDS), then you wouldf realize the need for the CDS to isolate credit risk and allow real money accounts (you know the big pension funds and traditional asset managers NOT hedgies) to actively BUY new issues in the primary bond market with less downside risk. The need to put money to work means that there is a natural demand for IG issuance, and obviously there is a natural supply for refis in IG markets. However, without a functioning CDS market (without the need for insurance-style regulation), these non-fast money accounts would be unable (or unwilling at anything other than uneconomical spreads) to buy new issues. Even with a massive cash-CDS basis currently, counterparty risk is keeping these guys on the sidelines. If we put CDS on an exchange with a central clearing house, I GUARANTEE once again that new issue markets will pick up and the liquidity freeze will thaw in corporate credit.
    This is not an issue of 'naked short selling' but more of risk transfer and risk premia - no-one is willing to act coz no-one knows who is infected - if counterparty risk is removed from the picture then liquidity will thaw and as far as i can see, insurance regulators have not exactly been at the top of their game in terms of regulatory control (ABK, MBI, FSA, AIG, HIG)?
    Sorry to nag on this one BUT it is really important that people understand the markets that provide a platform for their stock market speculation and how a simple over-regulation can have huge impacts.
    Remember - counterparty risk (sometimes called Herstatt risk) is the issue - NOT regulatory control/restriction on protection buyers.

    as far as po'd in Plano is concerned, CIT and SLM are in even nore trouble in CDS land, trading considerably wider (riskier) than MS or any of the brokers - you are absolutely right - they are all in the same fund short and lever up boat and CDS simply reflect the reality of their chances of default.
    Reply
  •  
    Oct 08 03:44 AM
    Interesting CreditTrader, I like the new CDS exchange idea, maybe some counterparty obligation capital ratio/requirements as well.. I tried to figure out a solution on blog.. This is a disaster, these banks just levered horrible debt investments and insured so called A securities against one another. It seems all risk management relied on moody's/s&p, and once a letter gets taken away, look what happens to AIG and the financial mkts! Could've been cross-default domino game if they didn't get subsidized, plus I understand how everyone can blames the shorts.. but in the end it's how these companies were managed that put them in this mess, and the rating agencies were tooo slowwww. Risk management was fundamentally flawed all around, and nobody can forget smart investors in 2007 coming out publically on tv saying we could see big problems down the road, with spreads tight and vix low. www.distressedvolatili.../
    Reply
  •  
    Oct 08 08:16 PM
    I appreciate the comments here. Highly informative and detailed...and not the mindless drivel that has, on occasion, shown up as "news"
    Reply
  •  
    Oct 09 08:48 AM
    dear author: you suck. do your homework on the hedge fund industry before you spew filth like that. everybody said that hedge funds were going to blow up the world, and look who caused all of this, the BANKS. now we hedgies are stepping in to provide capital because the banks can't. yes, we will see a lot of funds evaporate in the next six months, and we call that financial Darwinism. buh-bye.


    Reply
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