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As Morgan Stanley Unwinds Its Massive MBIA CDS Losing Position, Is A Billion+ Hit To Earnings Coming?

Tyler Durden's picture





 

When we reported on some peculiar action in MBIA CDS back in February, we said that one of the reasons for the massive tightening in MBIA CDS which ripped from 55 pts up to 37 pts in the span of two weeks was possibly on CDS commutation speculation (this in addition to ongoing aggressive litigation by MBIA against mortgage originators who may be commutating CDS in a quid-pro-quo fashion to achieve prompt settlement). But whatever the reason for the move, one thing was certain: one bank more than anyone, will be hurt materially by the move - Morgan Stanley. As we said "According to a source, Morgan Stanley was short risk the monoline after it had obtained protection on a static pool of CMBS via an MBIA-related entity called LaCrosse Financial. And as LaCrosse wrote protection against the static pool that was non-transferrable by Morgan Stanley, the bank hedged its counterparty risk by purchasing protection on MBIA itself. So while CDS was blowing out, MS was profiting. Then over the past two weeks, the bank has seen hundreds of millions in paper P&L evaporate through the window. The only question is when will Morgan Stanley close its now underwater protection (which continues to bleed a substantial amount of theta), especially since the actual credit event may have just been pushed back indefinitely. In other words, those who are short the MBIA CDS may wish to wait just a little longer, and see just what the breaking point on Morgan Stanley's collateral call is." Well, per another source, and per Euro Money magazine, that breaking point has been reached and MS has now been forced to close its exposure, at a loss that some speculate could be in the billions.

From Euromoney:

Morgan Stanley recently unwound credit hedges on monoline insurer MBIA at a potentially significant loss. This could hit first quarter results for Morgan Stanley’s troubled fixed income division and compound its reputation as disaster-prone, at least when it comes to credit trading.

Morgan Stanley’s current woes stem from its decision to purchase enormous amounts of credit default swap protection on MBIA. When the highly leveraged specialist insurance firm appeared likely to fail in 2008, 2009 and much of 2010 these trades by Morgan Stanley probably looked like a sensible bet. Old structured finance deals by the bank that were insured by MBIA would be covered and there was a potential trading profit from the default swaps in the event of a bankruptcy filing.
 
Unfortunately much of the protection owned by Morgan Stanley was bought at levels that implied a near guarantee that MBIA would indeed default on its obligations.
 
When the monoline cheated death and staggered through 2010, its credit spreads began to fall from levels that reflected a market assumption about its likely demise. Morgan Stanley racked up losses on monoline credit counterparty exposure last year of $865 million and recent market trades indicate that it may have crystallized a further loss by unwinding hedges as MBIA spreads came under renewed downward pressure. Spreads for three and five year default swaps fell from levels around the equivalent of 3,000bp in mid January to roughly 1,800bp by late February, pointing to a significant hit for Morgan Stanley, which was the protection holder on much of the outstanding derivatives exposure in the market.

Just how big is the total hit?

Some bank stock analysts estimated that Morgan Stanley might take a hit of around $300 million on its MBIA exposure for the first quarter, but derivatives dealers think the total could be much higher.

We completely agree. Per our source, the complete unwind of the MS position occurred in mid-February, meaning the bank was forced to eat the full 18 pts tightening difference.

As can be seen on the CDS chart below, if MS had a carried loss of nearly $1 billion on its books on monoline exposure (most of its MBIA), when MBIA was trading roughly 3,000 bps, the hit to the bottom line upon taking the loss when it traded at 2,000 must have been vicious, and likely ended up costing the firm over $1 billion.

Look for the market to reprice MS substantially lower as this news is gradually appreciated. And once that is done, the market will move on to Citi, which at last check had over $4 billion in notional exposure (per direct exposure to monolines) and as Lehman has taught us so well, notional becomes realized very quickly when there is a diametric shift in recovery expectations. In fact, this variable may be one of the main reasons why Citi has been limited to a $0.01 dividend.

 


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Tue, 03/29/2011 - 10:46 | Link to Comment Quinvarius
Quinvarius's picture

Proving yet again that no matter how much money we give the banks and financial institutions, they will blow it in a massive fashion.

Tue, 03/29/2011 - 10:58 | Link to Comment Sudden Debt
Sudden Debt's picture

oké, their system may be a bit flawed...

BUT THEY RECEIVED A TIP ON A HORSE NAME "CRIPPLED" THAT CAN'T LOSE!!

if we just give them 7 trillion more, THEY'LL BE ABLE TO BREAK EVEN AND STILL HAVE ENOUGH MONEY LEFT TO BUY A IPAD2!!

 

CAN'T LOSE!!

 

Tue, 03/29/2011 - 16:17 | Link to Comment curbyourrisk
curbyourrisk's picture

I-WINNING!!!!

Wed, 03/30/2011 - 02:39 | Link to Comment StychoKiller
StychoKiller's picture

Shoulda bet on "BeedleBaum!" :>D

Tue, 03/29/2011 - 10:50 | Link to Comment SheepDog-One
SheepDog-One's picture

Morgan Stanley cant even make money in a rigged game? Who at MS peed in Timmahs Cap'n Crunchberries?

Tue, 03/29/2011 - 11:04 | Link to Comment Sudden Debt
Sudden Debt's picture

It's Goldman's and JPM's game and Morgan isn't invited.

 

as Kadafi would say:

HALBALLA LALA BULLSHIT!!

Tue, 03/29/2011 - 10:49 | Link to Comment oogs66
oogs66's picture

I wouldn't get too excited about this.  Its probably largely a hedge against positions it owns, so their exposure is likely only to the basis and has probably been leaked in quarterly.  Could be wrong, but I would be shocked if they have such a large outright position.

Tue, 03/29/2011 - 10:50 | Link to Comment SteveNYC
SteveNYC's picture

Quick, get Bernanke on the phone pronto! We have a hole that needs to be filled with some paper, ink and linen....

Tue, 03/29/2011 - 10:54 | Link to Comment Cdad
Cdad's picture

Nah...Morgan Stanley just reduces its cash reserves, calls them earnings...presto...hole filled.

All America needs right now, more than it needs more criminal syndicate Wall Street bankers, is more creative accountants.

All is fine.  After all, how much is $1 billion anyway?  Nothing....loose change scraped out of some Fed budget somewhere.  Joe Taxpayer is always there to rob...no need to hit the bonus pool or anything.

ummm  /f'n sarc4

Tue, 03/29/2011 - 10:54 | Link to Comment jkruffin
jkruffin's picture

Who didn't realize that Morgan was next to go.....First Lehman, then Bear, then Merrill, and next up is Morgan.  Who else is left?  None.  That leaves GS and JPM to rule the world again having taken out all the competition.  Until they collapse themselves.

Tue, 03/29/2011 - 18:09 | Link to Comment Fíréan
Fíréan's picture

Morgan Stanley made huge losses on real estate investment previous and Barclays ( owed bilions by MS) came to the rescue, same Barclays which took up Lehman ( at a discount and made huge profit from it) . Now Barclays looking for way out of UK., where  considered too big ( bigger than UK GDP), rumoured to be also looking for USA bank to purchase.  Will Barclays come to "rescue"  of MS again, or eat it up at a discount, as exit strategy ?

Tue, 03/29/2011 - 10:55 | Link to Comment FunkyMonkeyBoy
FunkyMonkeyBoy's picture

Stick it on the taxpayers tab of this generation, the next generation, and the next...

...courtesy of your criminal overlords.

Tue, 03/29/2011 - 10:57 | Link to Comment Dan The Man
Dan The Man's picture

i sure wish i understood this one

Tue, 03/29/2011 - 10:58 | Link to Comment TwoShortPlanks
TwoShortPlanks's picture

Wow, maybe they wanna buy some Gold and cover those losses? LOL

Tue, 03/29/2011 - 11:04 | Link to Comment RobotTrader
RobotTrader's picture

Sorry, but gold and silver will get decimated if MS, GS, and the rest of the financials suddenly hit the airball zone and start freefalling.

I'm still amazed at how the gold bulls still don't get it.  PM's and PM stocks are the first items dumped in a crisis.  Just look at the horrid action in AEM, NEM, etc., a clear example of how these stocks are crapped upon at the slightest hint of a derivatives or banking crisis.

Yes, these stocks will come rocketing back, but only if the Dow turns around and starts heading back up to 15,000.

Tue, 03/29/2011 - 11:10 | Link to Comment Dr. Engali
Dr. Engali's picture

That's true  gold and silver will get smacked but  it will present a great buying opportunity.

Tue, 03/29/2011 - 11:38 | Link to Comment fredquimby
fredquimby's picture

Gold "paper" may get "smacked" but physical is physical is physical.

There ain't no substitute. Certainly not a paper one.

 

 

 

Tue, 03/29/2011 - 11:47 | Link to Comment cowdiddly
cowdiddly's picture

PMs are the first things dumped in a crisis? I think you are in for a history lesson. PLLLLUUULEEEEEEESSS. Just like 2008 Huh. Keep holdin that paper mate and praying for momo or pomo and I will spend one of my Buffaloes to set your broken arm after you have to jump out of your trailer house window.

Tue, 03/29/2011 - 12:04 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Robo,

Any smart investor knows that "paper" gold and silver is not trustworthy.  I dumped half my paper holdings in November to buy more hard assets and land for my business.  Still have plenty of physical.  Now get the Fed out of the way so we can get back to work.  If they keep fucking things up by allowing blatant fraud at all levels to persist, then all bets are off.  People starting to wise up to the banking cartel and their monopoly.  If the global puppet masters were smart they would prosecute ALL the fraud and allow some genuine competition and deflation to continue.  Greed may be their own undoing, eventually ALL things paper go bidless.

Tue, 03/29/2011 - 11:00 | Link to Comment RobotTrader
RobotTrader's picture

It really doesn't matter.

The Fed will simply allow the banks to mark to "make believe".

It's all rigged.  Nothing will be marked to market.  They will just assign some fantasy value to it and let it sit on the books for 20 years or so, until the securitization market is once again booming, at which point MS and GS will offload this garbage to hapless speculators.

Within days, MS stock will get sold out, and mo-mo players will start jumping all over it in order to gun for another squeeze.

Earnings don't matter.

All that matters is price action, chart-painting, and momentum.

Tue, 03/29/2011 - 11:04 | Link to Comment Cdad
Cdad's picture

Robo,

Ummmm....kinda.  Seems like you are missing something.  Seems like the underpants gnome thing.  You seem to be missing the third step, momentum breaks on [insert whatever stupid catalyst], and people turn and dump into a bidless book causing the shares to crash.  

Ummm...if you put that step back in there...ummmm...you don't got no underpants gnome cycle to book profits on.

But other than that...spot on, Robo!

Tue, 03/29/2011 - 11:46 | Link to Comment SheepDog-One
SheepDog-One's picture

Ol Catfishmouth so nuff do loves his paper!

Tue, 03/29/2011 - 12:09 | Link to Comment buzzsaw99
buzzsaw99's picture

the bernank buys the underpants.

Tue, 03/29/2011 - 11:50 | Link to Comment Fearless Rick
Fearless Rick's picture

"until the securitization market is once again booming"

When's that? 2135? Maybe 2380? Those are dates, years, not the value of the S&P.

Securritization, like globalization, are dead, like all -izations.

How about you mortgagizate your FRNization with a bet on the complete iPadization of the world.

Tue, 03/29/2011 - 11:06 | Link to Comment SwingForce
SwingForce's picture

Don't they read the TBTF guidebook?

Tue, 03/29/2011 - 11:06 | Link to Comment buzzsaw99
buzzsaw99's picture

Morgan Stanley loses money the old fashioned way!

Tue, 03/29/2011 - 11:05 | Link to Comment Dr. Engali
Dr. Engali's picture

Couldn't happen to a better group of people (except maybe Goldman slacks ). Unfortunately they will sluff it off on us.

Tue, 03/29/2011 - 11:07 | Link to Comment Robslob
Robslob's picture

1) Wake me up when banks are losing Trillions (Billion is so 2008)
2) Wake me up when Gold is $8,000 ounce
3) Wake me up when a dollar is worth a dollar
Strike that...if the dollar has value we would be in a Depression

Tue, 03/29/2011 - 11:12 | Link to Comment reachsb
reachsb's picture

The trillions of Dollars handed out to the bandits in the banking system till date will all eventually vaporize. The shadow banking system is caught up in this massive gordion knot from which it won't be able to extricate itself. Just imagine if instead of bailing out these parasites, we had poured all that money into our infrastructure, R&D, etc?

Tue, 03/29/2011 - 11:25 | Link to Comment writingsonthewall
writingsonthewall's picture

For 0.5 Trillion would could have built a large solar powered moon base.

 

We blew 1 Trillion on bailing out the system - which looks like it didn't even get a result!

 

I know which one I would prefer. I quite fancy a moon trip.

Tue, 03/29/2011 - 13:38 | Link to Comment reachsb
reachsb's picture

Absolutely agree. We could have setup some rudimentary mining operations on the Moon or other nearby planets. In order to do so, the Govt would have had to invest in massive R&D to get our Aerospace program upto speed.

The Fed has always been accused of creating market distortions in order to solve minor problems. One of the distortions has been the undue weightage assigned to Finance as a career choice for some of the brilliant minds in the nation. We have nuclear physicists, PhDs from other engineering disciplines, etc. all transitioning into Finance from their core competencies. This translates into a net loss for the other productive sectors of the economy (Finance is not a productive sector of the economy. It's actually a parasite on the US Economy - sucking away the blood from the sectors that actually contribute to GDP growth).

As a society, how much arbitrage can we play or how much fine tuning do the CDS swaps need? It's insane to stand apart from the maddening crowd and observe the herd mentality of the lemmings. Wall Street is so ensconced in its own world, that it hasn't even realized that it has morphed into a parasitic species that is on its last legs - when parasites become cannibalistic and prey on each other after sucking the marrow of the host. Therefore the constant need to keep inventing one ponzi scheme after another to keep the revenues coming in and feeding the beast. The Abacus CDOs were a classic example of cannabilizing your own.

The sooner we cut off the food supplies to these parasites the faster the economy can heal.

Tue, 03/29/2011 - 12:06 | Link to Comment Manthong
Manthong's picture

"If... we had poured all that money into our infrastructure,"

 

How do you like your poison, corrupt banks or corrupt infrastructure contracts, politicians and unions?  

Tue, 03/29/2011 - 11:21 | Link to Comment Robslob
Robslob's picture

Or just poured it on ourselves and let us decide where to spend it...oops wait a minute, that is the difference between a "democracy" versus a "republic"....

Ben, No Weimar for you 1 Year!

Tue, 03/29/2011 - 11:49 | Link to Comment Seasmoke
Seasmoke's picture

Morgan Stanley is still in business ?

Tue, 03/29/2011 - 11:58 | Link to Comment monopoly
monopoly's picture

Except for the Giant Squid, could not have happened to a more worthy enterprise.

Tue, 03/29/2011 - 12:04 | Link to Comment luk427
luk427's picture

On the bright side executive bonus packages will rise. It's tuff doing God's work these days.

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