Via Peter Tchir of TF Market Advisors
The move in Morgan Stanley CDS has been grabbing some attention. It has moved wider than any of the other banks. Its exposure to French banks in particular has been part of the reason. Potential hedging of counterparty exposure has also been listed as a reason. (Once again I can’t help but wonder why derivatives in general, and CDS in particular, didn’t get forced into clearing or exchanges after Lehman).
Those are both valid reasons, but I wonder if there is concern about its exposure to Asia and Asian property markets are playing a role as well. Here is a graph showing the CDS spreads of MS, GS, BAC and Citi. BAC underperforms whenever mortgage lawsuits are in the headlines. All the banks have moved wider as the problems in Europe have continued to escalate, but the underperformance of Morgan Stanley is fairly recent. It is only in the past 2 weeks that it has blown through BAC.
Since the European problems have been around for awhile, I’m not sure it makes complete sense to blame the underperformance on their exposure to French banks. Just below the radar screen of what is trading out there, are problems with Emerging Market corporate bonds in general, but specifically for Asian Property bonds. These bonds have been dropping in price over the past two weeks and have been part of why China CDS is blowing out. The price drop for assets tied to Asian properties is big enough to have an impact.
This graph has MS CDS along with SocGen, France, and China CDS. SocGen CDS has actually improved a lot in the past 2 weeks. If MS was just going wider on the back of French banks, it should have seen more relief. Even French CDS has been relatively stable, so it doesn’t explain the move particularly well either. On the other hand China started widening right around the same time as Morgan Stanley started underperforming. MS CDS is currently at 470 at China is above 200.
I tried looking through the annual report. I could see exposure there for French banks but I remain confused about how much net exposure there really is as the reported numbers are based on Federal Financial Institutions Examination Council’s rules – try saying that 5 times fast. Level 3 exposures still seem high and in 2008 that was a concern, and could possibly become a concern again.
I don’t know whether Morgan Stanley is rich or cheap at these levels, but I think there is more digging that needs to be done and it should focus on Asian exposures because that seems to correlate best to the recent moves.