On February 10, 2008, I created an extensive blog post, explicitly labeling Morgan Stanley as "The Riskiest Bank on the Street!" To my knowledge, I was the only one to make such a blatant accusation. Of course, months later Morgan Stanley and all of its brethren started collapsing.
Many attributed this to the overall market malaise, I didn't.
In September of 2008, 7 months after the first bearish report, I penned "As I said, the Riskiest Bank on the Street", which essentially compared my opinion, analysis and most importantly accuracy, to that of the Street's sell side, as excerpted...
For all of those who had/have a buy on Morgan Stanley, contact me for a special institutional subscription to the blog. I have said Morgan Stanley is a very strong short candidate (for about 9 months now)
Well, now is the time to pose the question again. "Is Morgan Stanley once again 'The Riskiest Bank on the Street?". Subscribers (click here to subscribe) are asked to download our newest outlook on this bank - MS 2Q12 qualitative review (432.08 kB 2012-06-18 09:57:10). Remember, we believe Reggie Middleton and his team at the BoomBust bests ALL of Wall Street's sell side research - simply reference "Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?"
As excerpted from the aforelinked MS 2012 link:
- Debt Valuation Adjustment of USD 2.0 bn in 1Q2012 raises some concerns
Morgan Stanley reported Q1 2012 consolidated net revenue of USD 6.93 bn, down nearly 8% from USD 7.57 bn in Q1 2011. The Bank disclosed that the results for Q1 2012 and Q1 2011 included negative revenues of $(1,978) mn and $(189) mn, respectively, related to the movement in Morgan Stanley's credit spreads and other credit factors on certain long-term and short-term debt (termed hereinafter “Debt Value Adjustment or DVA”). Excluding DVA, net revenues were USD 8.9 bn and USD 7.76 bn for the two quarters, respectively.
Since I, personally, think the logic behind DVA hits/additions to revenue is unrealistic, this in and of itself is not much of an issue from a valuation perspective. However, the amount of DVA in 1Q2012 draws special attention for it is an issue. The figure increased from USD 189 mn in Q1 2011 to almost 10 times to USD 1,978 mn in Q1 2012.
Debt Value Adjustments – Q1 2011 to Q1 2012 (USD Million)
The adjustment accounts for nearly 25% of Q1 2012 revenues which on gross basis increased 14.7% (Y-on-Y). That is a very, very significant chunk and it’s alarming that it hasn’t drawn more attention from investment and analytical practitioners.
The timing of the write down raises the following suspicions:
1) Was the adjustment postponed in preceding quarters to be recorded in the books of a quarter which witnessed healthy growth in revenues?
2) Exactly what caused such a huge loss in Q1 2012? The macroeconomic environment in Q2 2012 is not any better than that of Q1 2012. Are we going to see a similar write down again in Q2 2012? Or more accurately put, will the drivers of said writedown manifest themselves in Q2 2012, just to pop up in public reporting sometime in the future when most appropriate from an accounting perspective?