Margin Stanley Is Back: Bank Must Post $10 Billion In Collateral In Case Of 3 Notch Downgrade

Tyler Durden's picture

Last week it was Bank of America. This time it is the bank once again known as Margin Stanley. From the 10-Q: "In connection with certain OTC trading agreements and certain other agreements associated with the Institutional Securities business segment, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade. At March 31, 2012, the following are the amounts of additional collateral, termination payments or other contractual amounts (whether in a net asset or liability position) that could be called by counterparties under the terms of such agreements in the event of a downgrade of the Company’s long-term credit rating under various scenarios: $868 million (A3 Moody’s/A- S&P); $5,177 million (Baa1 Moody’s/ BBB+ S&P); and $7,206 million (Baa2 Moody’s/BBB S&P). Also, the Company is required to pledge additional collateral to certain exchanges and clearing organizations in the event of a credit rating downgrade. At March 31, 2012, the increased collateral requirement at certain exchanges and clearing organizations under various scenarios was $160 million (A3 Moody’s/A- S&P); $1,600 million (Baa1 Moody’s/ BBB+ S&P); and $2,400 million (Baa2 Moody’s/BBB S&P)." As a reminder, on February 15 Moody's warned it’s considering downgrades of US banks and may cut Morgan Stanley as much as, you guessed it, 3 notches. Needless to say this explains why "CEO James Gorman has met with the ratings firm more often than usual in the past quarter." Net - if the firm sees a 3 notch downgrade as warned the hit will be an AIG-shudder inducing $9.6 billion, or one third of the company's market cap, and enough to leave all shareholders wishing they had exposure to Greece, and no exposure to Morgan Stanley.

In some better news, Morgan Stanley reported that is trading magic is back making over $100 million in trading profits on 9 days in the past quarter:

Hopefully the firm is as profitable in the current quarter if indeed Moody's follows through on its threat and crushes the equity value of the company.

All joking aside, Morgan Stanley is so lucky it is a Bank Holding Company and has billions in FDIC-insured deposits to buffer any blow to its balance sheet.  Right?