Proof Of Another Big US Bank Collapse? Investment Banks Rated "Buy" By Other Banks? What Does It Take For Investors To Learn?

Reggie Middleton's picture

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).

Wall Street has said the following (from, ABR = average broker recommendation): 

(NYSE) $21.75

Current ABR


ABR (Last week)


# of Recs in ABR


Average Target Price:


LT Growth Rate


The average broker recommended price for that period (and this period as well) was/is absolutely absurd, and has no grounding whatsoever in reality. This is what my report said in 2008:

We value Morgan Stanley at US$20.76 per share, 58% lower than the current market price – We have analyzed Morgan Stanley exposure toward the Level 3 assets and its exposure to unconsolidated VIEs. To value Morgan Stanley, we have used the Discounted Cash Flow (DCF), Price-to- adjusted book (P/BV) and Price-to-Earnings (P/E) multiple methods. Based on our weighted average valuation, we arrive at a fair value of $20.76 which represents a downside of 57% from current levels of $48.25.

Look at graph below to determine who was closer to the truth, Reggie Middleton and his team, or Wall Street - all of Wall Street!

Does this make you wonder why create posts such as Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? It should be blatantly apparent that anyone who follows Sell Side researh over that of BoomBustBlog is at best taking extreme risks with their capital, and more realitically headed for disaster and deserving every bit of it along the way. The telling portion of this tale is today's Bloomberg article ilustrating a fact which we suspected, but which no one really knew for sure except Wall Street banking insiders, and that was that MS took $107 in loans from the Fed during 2008. More than any other entity in the history of the Fed, more than all of the banks who had both larger balance sheets and asset basis' than MS, more than anybody. So, was I right? Was MS truly the The Riskiest Bank on the Street? We shall delve into the Bloomberg article, but first, a few more excerpts from the aforementioned blog post of January 2008:

"Worsening macro and market conditions to restrict revenue growth – Financial services industry witnessing its toughest times in recent history faces a tough task of getting things back to normal. The deteriorating macro environment coupled with flagging confidence among investors/customers alike, things are more likely to get worse than better."

"as tests to its excessive exposure to the anemic capital reserves of its counterparties, namely monoline insurers and hedge funds."

Now, from Bloomberg: Morgan Stanley at Brink Got $107B From Fed:

As markets convulsed in September 2008, Morgan Stanley (MS) Treasurer David Wong briefed the Federal Reserve on a “dark” scenario in which the U.S. firm would need at least $10 billion of emergency loans from the central bank.

It got 10 times darker by month’s end. Morgan Stanley borrowed $107.3 billion, the most of any bank, according to data compiled by Bloomberg News using information released in response to Freedom of Information Act requests, related court orders and an act of Congress.

Morgan Stanley’s borrowing -- more than twice the amount all banks got from the Fed in the market squeeze that followed the Sept. 11 terrorist attacks -- peaked after hedge funds pulled $128.1 billion from the firm in two weeks, documents released by the Financial Crisis Inquiry Commission show.

The first comprehensive examination of the Fed’s emergency lending reveals how close the New York-based bank came to running out of cash because of a run on its prime brokerage, the unit that finances hedge funds’ trades and holds their cash and securities. The Fed loans also show the degree to which Morgan Stanley and other banks depended on such brokerage accounts for funding, even though clients could close them on short notice.

“These were like hot-money deposits that could flee in an instant,” said Tanya Azarchs, a former Standard & Poor’s analyst who covered Morgan Stanley during the crisis and is now a consultant in Briarcliff Manor, New York. The firm “never thought that the hedge funds would get that spooked.”

Wow! Pretty damn prescient? Or just observant? I'll let you be the judge, but here's a hint: you don't have to be prescient to see any of this coming, and I'm no more special than any other Joe Schmoe on the Street - outside of being a lot less conflicted! Of course, it doesn't end there. Let's take a look at the Golden Boys from that same post back in September of 2008 ("As I said, the Riskiest Bank on the Street"):

Look at what I said in Reggie Middleton on Goldman Sachs Q3 2008 vs what the guys that most retail investors and family offices give their money says about Goldman Sachs... 

(NYSE) -114.50
Current ABR 2.96
ABR (Last week) 2.79
# of Recs in ABR 12
Average Target Price: $200.91
LT Growth Rate



Again, the average broker consensus is an absolute joke. Subscribers and long time readers know my price targets for Goldman were much more pessimistic. Who was right? I refer you to What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone…:

GS’s considerable leverage provides a means (the lever) of high returns to shareholders when asset prices are appreciating but the same becomes a very material economic concern when the asset prices lose value. With low trading revenues, GS has little cushion to absorb write-downs on these assets, leading to erosion of equity. As of March, 2010, the GS’s investments portfolio amounted to $339 billion (nearly 566% of the tangible equity). Referencing my previous posts, “Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look” and “When the Patina Fades… The Rise and Fall of Goldman Sachs???“, we can reminisce over the fact that Goldman BARELY earns its cost of capital on an economic basis, and that’s before considering the potential horrors which may (and probably do) lay on the balance sheet (for more on BS horror, referenceReggie Middleton vs Goldman Sachs, Round 2.

As for the Street and mean analysist estimates, this is the verbage (that's verbage, not garbage) that accompanies these reports via hyperlink:

Recommendations Research Page

Brokerage Research firms spend over a billion dollars a year to fully analyze and recommend stocks to their clients. Most of that expense is paid out as compensation to a group of highly intelligent, and well compensated, equity analysts. It is usually in your best interest to know what these Wall Street heavy weights think about your stocks before you make buy, hold, sell decisions. And there is no better place
to gather that information than on the Recommendations research pages on

Okay bloggers and bloggettes, this doesn't make any damn sense.Why would anyone not want to subscribe to truly independent research is beyond my reckoning. Mediocre independent research is better than top notch biased research any day. Just imagine what mediocre biased research will offer you.

I know I may be a little biased on this topic because I may stand to gain from selling subscriptions, but let me make
this very clear - I am an investor first and foremost. That is what I do all day, everyday. The blog always has, and probably always will, operate at a significant loss.The only reason I am bothering to make this post is because I am absolutely awed by the stickiness engendered by the sell side brokerage marketing machine. One would think that this site (or any independent research site) would be oversubscribed, if anything just because there is chance they may be trying to tell the truth. Okay, rant and rave is now offline...

So, to recap, I have accurately called the fall or collapse Morgan Stanley (The Riskiest Bank on the Street and Reggie Middleton on the Street's Riskiest Bank - Update), Lehman Brothers (Is Lehman a Lying Lemming?), and Bear Stearns (Bear Fight - A most bearish view on Bear Stearns in a bear market and Is this the Breaking of the Bear's Back?), Goldman as well (Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street and Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis) as well as very recently the French bank run (The French Government Creates A Bank Run…) and Wall Street's sell side opinion still regulalry runs diametrically opposed to mine. I pray thee tell me, who has truly earned their stripes through these rough times? I query, because I have recently picked out another potential failure and we shall see how serious this one is taken this time around. To refresh everyone's memory...

The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile Markets

Trade setups on the Squid coming up next for paying subscribers. This one will be tricky, for valuations tell an incomplete story which is the reason why I announced this one publicly. You simply cannot profit off of the ancillary Squid news.

And in closing, for anyone who is interested...


Key highlights of my archived research from 2008 (before the crash) on the "Riskiest Investment Bank on the Street":

The Riskiest Bank on Wall Street – Morgan Stanley has US$74 billion of Level 3 assets, over 200% of its equity, which is the highest amongst its peers. Although the Level 3 assets have declined from the previous quarters owing to huge writedowns, the reclassification of assets from from Level 2 to level 3 category continues as the liquidity for the troubled mortgage paper drys up.

Declining ABX index indicates troubled times are not over yet – Morgan Stanley used the performance of the ABX index as one of the benchmarks to writedown US$9.4 billion in 4Q 07. As this index continiues to witness downward trend, we believe that the asset writedown done so far, may not be sufficient.

Forensic Accounting of ABS Assets yields more woes - a security by security accounting of MSs ABS inventory shows at least 30% and probably 56% in additional losses coming down the pike, as well as tests to its excessive exposure to the anemic capital reserves of its counterparties, namely monoline insurers and hedge funds.

Losses from unconsolidated VIEs of $38 billion can wipe out almost half of the company’s total equity –Morgan Stanley has $20 billion of its unconsolidated VIEs assets in credit & real estate portfolio where the company expects a maximum loss ratio of 65%. Considering the worsening real estate markets, we believe that the company will incur huge losses on this portfolio. In addition, the company has $7 billion towards MBS & ABS portfolio and $10 billion of strucutured finance products.

Exposure toward Bond Insurers/private funds raises counterparty risk – The failure of bond insurers, on whose shoulders lie the rating of $2.4 trillion of bonds, raises a serious doubt about a systemic failure in the U.S. financial services industry. Morgan Stanley’s exposure of $3.6 billion toward the bond insurers may result in unforeseen losses for the company. The company has a counterparty credit risk exposure of $13.9 billion toward parties rated BBB and lower.

The riskiest bank on Wall Street – High exposure to Level 3 assets despite significant write-downs

Need to raise additional capital if current crisis worsens – Morgan Stanley raised $5 billion from China Investment Corp to maintain its capital ratios as it reported huge losses in 4Q 07. Going forward, as the credit market environment, the housing and real estate markets continues to crack, the company will likely report huge and may have to raise additional capital.

Worsening macro and market conditions to restrict revenue growth – Financial services industry witnessing its toughest times in recent history faces a tough task of getting things back to normal. The deteriorating macro environment coupled with flagging confidence among investors/customers alike, things are more likely to get worse than better. Furthermore, the decline in structured product revenues, risk averse nature owing to recent turmoil and the less active M&A environment will exert pressure on the company’s revenue growth in the coming quarters.

We value Morgan Stanley at US$20.76 per share, 58% lower than the current market price – We have analyzed Morgan Stanley exposure toward the Level 3 assets and its exposure to unconsolidated VIEs. To value Morgan Stanley, we have used the Discounted Cash Flow (DCF), Price-to- adjusted book (P/BV) and Price-to-Earnings (P/E) multiple methods. Based on our weighted average valuation, we arrive at a fair value of $20.76 which represents a downside of 57% from current levels of $48.25.

Click the read more link below to continue reading or download the richly formatted pdf version:

icon Morgan Stanley (287.96 kB 2008-02-11 12:49:56)

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chinawholesaler's picture

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thegr8whorebabylon's picture

Front page, bitchez!   ;)))

alagon's picture

Fiat currency is government money. Gold, on the other hand, is king's money. Better to be the king than Obama's bitch. I believe it was Thoureau who said something like "I had more freedom as a prisoner than I did as a taxpayer"

indio007's picture

I'll take braggadicio over pandering to the lowest common denominator (i.e. pathologically hopeful groupthink) any day.

PulauHantu29's picture

My former broker called me two weeks before the Lehman collpase recommending them and other financials....luckily I did not agree.....i fired him later...

Recently another cold call broker suggested muni bonds.....LMAO.

My guess is they need to duml this C-R-A-P off on the average investor before they go belly up. I was surprised when Paulson bought BAC....that was a sucker's play and I wonder how his genuis team came up with that....mmmm.

Bob's picture

I heard that, Reggie!  Tell it, brother!

jkruffin's picture

Americans as a whole are the dumbest in the investing world ever seen. They never learn, they continue to donate their money to the crooks on Wall Street. They continue to listen to CNBC hacks even after the last 2 crisis' should have taught them to turn the channel to something else. The only safe havens now are gold and silver...everything else is a farce.

thegr8whorebabylon's picture

lets try that again, bitchez

thegr8whorebabylon's picture

back on the front page, bitchez

Magister Ludi's picture

I generally can only get through about four-and-a-half sentences before your arrogance and shameless self-promotion induces spontaneous vomiting, rendering my keyboard useless.  Fortunately, one only needs about four to question the legitimacy of your post.  Let's take a look at today's opening brilliance:

"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."

Bear Stearns and Lehman Brothers no longer exist.  If you held those two stocks, you would have a couple bucks and nothing, respectively.  So wouldn't that make them the "riskiest" banks?

And who exactly attributed the collapse of the financial stocks to "overall market malaise"?  You're telling me you actually know people who thought financials were not the root cause?  I can understand why you think so highly of yourself if you keep company with individuals who came to that conclusion.

Please just support the cause and buy ad space from the site instead of putting up half-assed posts under the guise of content.

fx's picture

I have to agree with your sentiment, by and large. However, the self-congratulating style of the articles of course doesn't invalidate the research presented by Reggie. That being said, these lengthy look-backs with a boatload of braggings about his genius and greatness and how he saw all this coming before any other ad nauseum is indeed annoying and makes it hard to read through the end of his posts.

Diogenes's picture

He's an American with something to sell. By that standard he is far from the worst blowhard on the map. Just think, if you watch TV or listen to the radio you have to accept the commercial.

LynRobison's picture

Magister Ludi, you seem to be the arrogant one here.

JuicedGamma's picture

In 42 weeks 4 days you have posted exactly 4 times. Twice to trash Reggie a true prince who freely shares extremely valuable insight that i am sure you wished you possessed.

True he does promote, so what? The articles are well researched and thoughtfully presented. Relegating this to ads would be a great loss to the site, whilst you sir, would not be noticed.

Magister Ludi's picture

You're right.  That's a fair criticism of my track record.

JLee2027's picture

I could only get through 4 and a half words of your retort before I puked. Sorry!

fxrxexexdxoxmx's picture

You are not required to click and read any post on ZH. It is a choice. You can always head on over to CNBC to get the real scope on state of the markets.

topcallingtroll's picture

Reggie I put you up there with Adam Hamilton, probably the best independent general analyst.

The problem you will always face, as Keynes observed, was that it is better to fail conventionally than succeed unconventionally.

The mediocre, incompetent large brokerage analysts will always make more money than you and have more influence, even when repeatedly proven wrong.

Widowmaker's picture

Long live the US taxpayer backstopping rigged markets full of fraud and too big to fail!

Burn the racket and start the prosecutions.

Enough said.

Dragonsgrace's picture

I think the whole problem with Reggie is he is way too modest!  I want you to tell me many more times how great you are....really I do.  

vocational tainee's picture

reggie would you dance raggy with me?.....

Going Loco's picture

Reggie, I have said it before and I say it again. Just a little more care with the presentation and you could do much better in all respects - both as a subscription service and as a trader. Look  at Muddy Waters - that should be your role model. Every word carefully chosen and very few posts - but when Carson Block posts a report the crooked financiers quake in their shoes and his short positions make big bucks. I wish you the very best. You are one of the good guys. Heavens - look at what you are doing. You are describing the downfall of the financial system, step by step. The events that your analysis predicts and which then come true are going to be in the history books. By rights you should be in the history books too, and you should be a very wealthy man at the end of this strange episode in all our lives. The only thing holding you back is your presentation. Well, that's what I think. 

Diogenes's picture

How about the most honest analysis on the street FOR FREE. Not good enough for you, you have to have it with whipped cream and a cherry on top. Jeez.

Enough quibbliing and Reggie is apt to say to hell with those ungrateful mooches and I wouldn't blame him.

FreeNewEnergy's picture

Reggie, if I was a chick, I'd go down on you.



Hetero, Alpha Male

MrBoompi's picture

Reggie, if you valued every company they would probably come in at 58% below "market price".  If you looked at IPOs, they are probably 58% overvalued.

Actual price discovery has been broken for a long time.  This is what happens in markets managed by central planners and fraudulent investment banks.



LookingWithAmazement's picture

Reggie, no big bank will ever fail anymore. This whole Financial Freakshow is way too profitable for the whole interconnected Rothschild-Khazarbunch. They swim & drown in their money, no matter how worthless all the paper crap is. When push comes to shove, The Bernank Ghost in the Machine brings up freshly printed money, to save the Khazar's day.

aminorex's picture

That only works until it fails.  You can squeeze a balloon in your hands only so far, before some portion escapes between your fingers, becomes overextended, and pops.  If you had infinite fingers, you would be a Hindu god, not a central bank.

JW n FL's picture

Great Job! Reggie as Always!!

This week Max Keiser and co-host, Stacy Herbert, look at how quantitative easing is good for the rich, bad for the poor and how sterling is offering no refuge. In the second half of the show Max talks to Richard Heinberg, author of The End of Growth, about the role of energy in the current debt crisis.

sodbuster's picture

>and I'm no more special than any other Joe Schmoe on the Street - <

You don't give yourself enough credit, Reggie, I think you and your team are pretty darn sharp!!


gwar5's picture

So, Morgan Stanley is going down like a cheap hooker, eh?  Why should BAC have all the fun....


OT:  think we just had a mild earthquake in NC..... house shook, waves in the pool outside confirms it. Either that, or Bernanke just unleashed QE3 and the world didn't take it so good. 



rocker's picture

Bank of America having all the fun.  I got one question I do not understand.  Why does CNBC constantly and consistently defend the Banks?

Tonight's Fast Money has everybody defending BAC and the "rumor" that their balance sheet is bad.  Hello. Do Mark to Market with all the crap and we will believe it is good. Hiding half their crap off balance sheet is fraud to investors. That is plain and simple.

Also, Hey Tyler, they took a cheap shot at ZH tonight too.  If they only did half the investigating and verifying  that ZH does.

CNBC has told us all the banks are buys 20% ago.  Hello. Who was wrong, the market or CNBC with their phony analysis and stock pumpers.

shazbotz's picture

I'm surprised people aren't more shocked at the conflict of interest in S & P's new President


It's all rigged!

Rainman's picture

That S & P poleaxing was such an obvious tell.....shit, if Uncle Sugar had any money or credit he'd get wiped out at the poker table within minutes.

Bob's picture

Sharma did his job well . . . this is his reward, not his punishment.  When S&P turns on the TBTF's (rather than scapegoating governments) whose water they continue to carry, then they might have earned some real credibility. 

TJ00's picture

Excellent work as always, however if you really want to make a lot of money and help us out on ZH I have one suggestion-


Reggie Middletons Bank


You're probably the only person I would trust to run a bank with my money in it.

disabledvet's picture

Slight factual error other than that i agree: MS didn't collapse. It did require a massive infusion of cash flow-but it was Japan that provided the actual "confidence" that allowed MS to vontinue as an independent entity which it still is today. This was not the choice of the Sec Tres at time either.

aminorex's picture

I think Middleton's point is that the underlying malaise has not been resolved.  His implication is that MS is the riskiest of the remaining, today, not 3 years ago. The credibility of that point is undermined by a presentation based on historical documentation, a 2008 view of the world,  lacking in fresh numbers.

Fiat2Zero's picture

Reggie, amazing calls as usual.  I used to bristle at your braggadoccio, but now I understand it.  The essential human problem is that "the supply of the truth is always far greater than the demand."  People would rather continue clutching at their illusions than confront the truth.  It has nothing to do with (making vast amounts of) money, and everything to do with the fact that humans hate change, crave comfort, and yes, will give away their liberty for trains that run on time and a full belly.

You're telling people that no one is in charge and the future is going to be very tumultuous.  No wonder you have to carry that samurai sword - people want to kill the messenger!

Keep up the great work.  I'm not a subscriber, but only because I'm not a trader, but more of a speculative investor, and it doesn't seem to fit my current trading abilities.

But I get the sword and the swagger.  Keep the hits coming man!

falak pema's picture

for a trader there is a choice of hedging, shorting, puting, calling, on both sides of the pond. On all types of derivatives. It must so mind boggling it sounds like pulling at straws, given the uncertainty and lack of visibility. Hope your glasses are infra red and can see in the dark. Found any four leaf clovers that don't fade and whither the next day?

Roller coaster wild. Hope you can buy that Eiffel tower! Your buddy Roubini sounds very gloomy.

rocker's picture

I am over 90% Cash and staying there until they blow this up or else I just stay out.

Preservation of captial is more important than the squid sucking any position one puts on.

Their computers can manipulate and take you out long or short in any stock.

Papasmurf's picture

Since it is cash they are ultimately blowing up, you're plan is going to fail you.

Dburn's picture

Reggie  this is where you rock.

rocker's picture

+1  Thank You ZH.  All of Reggie's stuff belongs on the main feed.

Somebody has to tell it like it is.

Bloomberg on the floor: Market being driven by unusual forces.  Could we say fraud and manipulation.

And they wonder why everybody is leaving our markets.  What's to ponder here. Mr Robato.

sunnydays's picture

All the Wall Street banks have each other's back.  They will all rate the other a "buy".  I noticed that on CNBC the other day, how Citi was saying BOA was a great buy.  One fraudster protecting another.   Who even believes Wall Street anymore?  Not anyone that reads Zerohedge.

Bob's picture

Yet ZH howls about the injustice of S&P replacing its CEO . . . whose sudden conversion to "honesty" amounts to nothing more than shifting attention from insolvent corporations to "insolvent" sovereigns who support them.  Sure, it's nice to see them do something that corresponds to reality, but how naive must we be to swallow it at face value: The federal government and hundreds of lower units deserve downgrading yet TBTF zombies solvent only due to Mark to Myth assets and implicit government guarantees--not to mention ZIRP--go unremarked by this suddenly heroic rating agency?

It looks like a simple political play to me--get the attention off the criminal private sector and pile on in the villainization of government.  When the TBTF again are in trouble, the stage is set to put the blame squarely upon government . . . and squeeze taxpayers to pay up on debts that are claimed to be a consequence of their own government's "irresponsible" actions. 

What a con. 

Sharma did exactly what best served his Masters' interests.  Now he gets "retired" as if they're unhappy about it. 

What a con.