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Morgan Stanley CDS Curve Inverts As Risk Highest Since Q4 2008

Tyler Durden's picture


We have been discussing US (and European) financial risk for some time (especially recently with regard MS exposure to French banks). Since we published that article, we have seen incredible shifts in MS CDS and bonds even as stocks appear to shrug of some of the reality of the situation. An excellent article on Bloomberg last evening pointed out that not only was MS CDS at rather extreme levels, it was quietly as risky (if not more so) than many of the European banks that are making the headlines. Not only is MS CDS its highest since its spike highs in Q4 2008, the curve is inverted with 1Y risk trading 500/550 against 5Y risk at 455/470 which strongly suggests jump risk (or counterparty risk) is being aggressively hedged. With over $4.5bn of debt maturing in Q4 (which we have been pointing out for months - TLGP issues) and the increasingly binary nature of any outcomes, it seems the only real buyer of any MS debt are basis traders as the difference between bond spreads and CDS has halved in the last few weeks.


The only time that CDS for Morgan Stanley was higher was during the middle of the crisis when they spiked massively higher - the situation is becoming increasingly binary.

And the spread between bonds (which are trading wider - cheaper than) and CDS is falling (an upwards bias in the basis chart above) as basis traders (remember we discussed these traders in yesterday's closing market snapshot) step in to scoop up with 100-150bps differential. However, bond liquidity can disappear very quickly when outcomes are so uncertain (see Q4 2008 Q1 2009) and ask Boaz Weinstein - so don't be left holding that bag.

Charts: Bloomberg


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Fri, 09/30/2011 - 09:24 | Link to Comment Careless Whisper
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The Careless Whisper Morning Report


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Pres Candidate Herman Cain Explains Why The Federal Reserve Was Better When He Was On It With Greenspan (@4:02)

NY Supreme Court Judge Upholds Fourth Amendment; NYC Cop Lied About Consent To Search

Bank Of America Has Some People Really Really Really Pissed Off

"SlutWalk NYC" To Hold March Saturday To Protest Sluts Being Blamed For Rape

Gov Contractor Losses Personal Data On 5 Million Military Patients

Volunteer 9/11 Responder Explains Why He Joined Wall Street Protest

15 Yr Old Boy Brings Bike In To Sears To Use Craftsman Wrench To Fix Bike; Arrested On 3 Counts

Broward County Sheriff Shakedown; Not Responding To 911 Calls After Midnight Tonight

Overseas U.S. Soldier Calls Dad In Alabama To Tell He's Gay, Posts Live, (Dad Response @ 5:02)


Fri, 09/30/2011 - 09:38 | Link to Comment doomandbloom
doomandbloom's picture

You should post this in the contributer section.


I miss the Project Mayhem reports...but this will do fine.

Fri, 09/30/2011 - 09:46 | Link to Comment SheepDog-One
SheepDog-One's picture

Warren to ring the NYSE opening bell? Who cares wasnt that sold to the Germans?

Fri, 09/30/2011 - 09:49 | Link to Comment Ruffcut
Ruffcut's picture

I noticed when MS went up a buck over a couple days, the puts did not move much. I need a good payday. BAC falling is nice, too.

I can only imagine Brooksley Borne shacking her head about the cds ponzi.

Fri, 09/30/2011 - 09:25 | Link to Comment Tense INDIAN
Tense INDIAN's picture

cramer just said Morgan Stanley was fine

Fri, 09/30/2011 - 09:30 | Link to Comment Jayda1850
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Said the same thing about bear stearns. 2008 Deja vu anyone?

Fri, 09/30/2011 - 09:37 | Link to Comment anynonmous
anynonmous's picture

all we need is a confirmation from Bove and it's a lock

Fri, 09/30/2011 - 09:52 | Link to Comment SheepDog-One
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Cramer Kiss of Death proclaiming a bank 'fine'...implosion in 3....2....

Fri, 09/30/2011 - 10:47 | Link to Comment Gadfly
Gadfly's picture

If Cramer said it's fine, then it's definitely time to sell!

Fri, 09/30/2011 - 09:28 | Link to Comment mayhem_korner
mayhem_korner's picture



This is like the market's version of margin hikes on banks.  Up, up, and awaaaaayyyy. 

Tee hee.

Fri, 09/30/2011 - 09:34 | Link to Comment bigwavedave
bigwavedave's picture

Why doesnt MS buy its own CDS? As a primary dealer this would be cheaper than a stock buyback program no?

Fri, 09/30/2011 - 09:41 | Link to Comment snowball777
snowball777's picture

And a great deal easier to keep under the radar. ;)

Fri, 09/30/2011 - 10:19 | Link to Comment Robot Traders Mom
Robot Traders Mom's picture

Who would they buy CDS protection from? Someone else that already has exposure to them through swaps, etc? All that would do is tell the world they are throwing in the towel.

Good idea, but not workable. A stock buyback may give them a little bit of breathing room, but they are trying to shore up liquidty and capital. Doubtful that would happen.

Fri, 09/30/2011 - 09:38 | Link to Comment Burnsy
Burnsy's picture

Probably just John Paulson pushing an illiquid market higher to hedge his totally fucked long posisiton in BAC from complete disaster. I am only half kidding.

Fri, 09/30/2011 - 09:37 | Link to Comment doomandbloom
doomandbloom's picture

Fire in the run run

Fri, 09/30/2011 - 09:38 | Link to Comment Burnsy
Burnsy's picture


Fri, 09/30/2011 - 09:39 | Link to Comment sabra1
sabra1's picture



Germany is rumored to have ordered printing plates to resume printing Marks, and is intending to walk. This does make sense, although the Germans would have to find a way to shield their banks from the impact of a massive shift off the Euro and into the Mark by Germans, which would spike the Mark higher and positively trash the Euro's value.

Fri, 09/30/2011 - 09:45 | Link to Comment snowball777
snowball777's picture

They've got some experience with changing horses midstream.

Fri, 09/30/2011 - 10:07 | Link to Comment disabledvet
disabledvet's picture

that would annihilate the European Union. I'm not sure it's really even "doable" in the sense that transfer payments within the Euro area would cease and ...well...then what?

Fri, 09/30/2011 - 09:40 | Link to Comment Belarus
Belarus's picture

OFF TOPIC: It's amazing how pyschologically important the despots must feel the 11,000 mark is on the DOW. With this kind of completely rigged trading, it seems there should be a daily open thread for everything that appears to be bullshit trading. 

Fri, 09/30/2011 - 09:47 | Link to Comment fdisk
fdisk's picture

"rigged trading"..

Why is that? Market moving up, except lots of moaning

from ZH members. Do you get lesson yet buying Gold at 1950?

Now you going to get another one by Selling S&P AT 1100.

Watch and learn.

Fri, 09/30/2011 - 09:53 | Link to Comment SheepDog-One
SheepDog-One's picture

'Market moving up'? What kind of upside down monitor do you have? Markets havent gone anywhere all year.

Fri, 09/30/2011 - 10:00 | Link to Comment somethingisrotten
somethingisrotten's picture

I sure hope you keep buying.  We do love trolls with bulleyes on themselves.

I will just break out the popcorn and watch this slo-mo trainwreck with my stash.

Fri, 09/30/2011 - 10:13 | Link to Comment fdisk
fdisk's picture

And I hope you shorting huge like that BBC pink moron..
And wait for brain activity recession.

Fri, 09/30/2011 - 10:21 | Link to Comment lizzy36
lizzy36's picture

P&L pics or you are just a troll.

Just an FYI, S&P basically flat since 2008. (despite $5T of fiscal and monetary stimulas) Gold on the other hand is up 96% in 3 years.

You seem like a clever guy, so I will let you figure correlation or causation.

Fri, 09/30/2011 - 09:45 | Link to Comment Belarus
Belarus's picture

Look at that fucking ramp. Should end up at least 200+ points for the day.

Fri, 09/30/2011 - 10:13 | Link to Comment Cone of Uncertainty
Cone of Uncertainty's picture

I'm buying some more ammo this weekend.

Fri, 09/30/2011 - 10:43 | Link to Comment ivars
ivars's picture

Here is comparison chart between my feb 6th chart of DJIA and actual prices. After 8 months with mistakes in the middle, its for last 2 months within 0-5% of actual DJIA:


In original chart, the trend continues to go down with increasing speed. Recession in the USA is guaranteed in Q1 2012.

Fri, 09/30/2011 - 11:05 | Link to Comment paul_Liu
paul_Liu's picture

Tyler is the man.

Very good analysis, even more professional than the Bloomberg one.

Fri, 09/30/2011 - 11:21 | Link to Comment Mr Warn-er
Mr Warn-er's picture

Morgan's aggressive pricing in the structured world has been a give away for the last few months.

Do NOT follow this link or you will be banned from the site!