Despite Raising VaR To Record, Morgan Stanley Revenues Are A Bloodbath
A few months ago, before it became a staple MSM topic, we speculated that the dereliction of capital markets by both equity and credit traders would mean a complete collapse in Wall Street sales and trading (aka hedge fund proxy) revenues, now that investment banks rarely if ever perform traditional IB activities like advisory and underwriting work. As the latest battery of Q3 bank earnings has confirmed, we were correct, however nowhere more so than as pertain to Morgan Stanley: the bank's Q3 revenues were an abysmal disaster, with total sales and trading revenue collapsing from $3.7 billion in Q2 (and $4.1 billion in Q1, $3.2 billion in Q3 2009) to just $1.8 billion. The drop was especially pronounced in Fixed Income S&T, which plunged from $2.3 billion to $846 million. Yet what is scary is that this plunge did not occur in an environment of moderating risk management: oh no. In fact, the firm's aggregate average trading and non-trading VaR in Q3 2010 was the highest on record, coming at $189 million! Meaning the bank had to stretch and put massive amount of risk on the books to eek out even these pathetic numbers. It also means that one day, as MS and others once again start raising their VaR in pursuit of that elusive last HFT dollar, another market crash will result in billions in trading desk losses in a span of minutes.
Risk is back, but after all why not? Thanks to the Fed, there really is no risk. We actually were surprise VaR for most banks was not a four digit number this quarter.