Morgan Stanley

Three weeks ago, before Lieborgate broke and the world finally understood what so many had been warning about for so long, we noted something else: that not only was LIBOR manipulated and fudged daily between 2005 and 2008, but as the chart in the attached post shows, it has been gamed every single day in 2012 as well. More importantly, we noted something else - the transition at the top of the British Bankers Association: the organization responsible for compiling LIBOR submissions from member banks, and reporting what the daily Libor fixing is. Because in the second week of June, the BBA's new head became... the former head of lobbying for none other than Morgan Stanley, Anthony Browne, a firm which itself was just caught red-handed manipulating rating agency "independent ratings" to benefit its bottom line (and which itself miraculous was downgraded by less than what the market expected in order to allow it to avoid several billion in collateral calls). And what did Anthony do at Morgan Stanley until June 12: he was head of Government relations for Morgan Stanley for Europe, Middle East and Africa and was previously an economic and business adviser to London Mayor Boris Johnson.  That's right - "head of government relations" for a rather prominent TBTF bank, being put in charge of daily Libor fixing. But everyone is shocked, shocked, that gambling has been going on here for years.

The FDIC decided to wait with its dose of pre-holiday humor until after the Barclays fixing for today's market close turned out to be spot on. And by that we mean that official release of the US banks' "living will" statements, which as far as we know is about the most worthless exercise ever conducted, and about the dumbest thing to be conceived by that very undynamic duo of Barney Frank and Chris Dodd. Because last we checked, the treatment of living wills in bankruptcy court, where all these firms will end up eventually anyway, is... non-existent. But the real fun is when one actually reads this indicative statement from Citigroup: "Citi is today a fundamentally different institution than it was before the crisis." And that's where we stopped. Because it is banks wasting their time (and taxpayer bailout money) on gibberish like this instead of analyzing the risk inherent in their prop positions that guarantees the next CIO-like blow up will not be just $5 billion but far, far more, and will certainly prove that living wills when one has to equitize tens of billions in unsecured debt are worth exactly didely squat.

Local Governments Which Entered Into Interest Rate Swaps Got Scalped

With Europe, the BBA, and virtually everyone shocked, shocked, that the global bank cabal schemed and colluded for years to manipulate interest rates, so far only America appears relatively blase, and totally ignorant, about the issue. Perhaps it is because the first bank exposed in the manipulation scheme so far is European, perhaps because it is just tired of all the endless crime coming out of the criminal complex known as Wall Street. It is unclear. Then again, America will soon have its own manipulation scandals to deal with: and if it is not the US BBA member banks, all of whom were just as guilty as Barclays, and the only question is which bank will be the sacrificial scapegoat whose CEO will have to demonstratively depart (to warmer, non-extradition climes), it will be the following story from Bloomberg which will likely pick up much more steam over the next weeks and months, detailing how the bank which just barely avoided a triple notch downgrade (wink wink) has had previous dealings with the very same rating agencies seeking to, picture this, artificially inflate ratings! So to summarize: Fed manipulates capital markets, HFT manipulates bid ask spreads, "self-policing" CDS pricing market groups fudge the prices on trillions in Credit Default Swaps, bank cabals collude and manipulate short-term interest rates, and now banks are confirmed to have manipulated the ratings on tens of billions of bonds using monetary incentives and threats. Is there anything in this "market" that was fair over the past several decades, and was actual price discovery ever actually possible? Because by now it should be very clear going forward all the things that actually make a free and fair market are forever gone, and that without endless fraud and manipulation by all the market participants who realize that anyone defecting the ponzi group means immediate and terminal losses for all, and all those calls for an S&P 400 would actually prove to be overly optimistic.

Sell side Wall Street vs Reggie Middleton on FB - 6 buys, 3 neutrals, avg price target $39. NOBODY came out with a short @ IPO besides moi. Guess where I stand now...

GS just did what it does best: pulled the rug from under its most troubled peer: "We are downgrading MS to Neutral and removing shares from the America’s Conviction List. Since being added to the Americas Conviction List on January 29, 2012, MS shares are down 27% vs. flat for the S&P 500. Over the past 12 months, MS shares are down 39% vs. the S&P 500 up 4%. When we added shares to the Conviction List, we noted that MS had addressed a number of legacy issues including (1) the conversion of the MUFG preferred stock to common to bolster common equity capital ratios, (2) elimination of the CIC preferred dividend, (3) removal of the MBIA relationship//hedge overhang, (4) write-down of legacy real estate assets, (5) elimination of non-core asset management businesses, and (6) near-completion of the  integration of Smith Barney and Morgan Stanley Wealth Management. While that all still holds true today and should be beneficial towards long-term “normalized” returns, we believe several capital market overhangs will reduce out-year earnings visibility and cap near-term outperformance. While too soon to tell how counterparties will react to a new capital market ratings distribution post-Moody’s, this cycle has proven that banks with the largest increase in funding spreads have generally lost fixed income trading market share. In addition, with a number of global macro uncertainties likely to weigh on capital markets activity for the foreseeable future, MS has outsized exposure here as well....we are lowering our 12-month price target for MS to $16 (from $20) based on 0.6X TBV (from 0.7x) to reflect challenged near-term earnings power."

Capitalism at its best: kick 'em while they're down.

Back on May 10, when JPMorgan announced its massive CIO trading loss (which may or may not have been unwound courtesy of a risk offboarding to another hedge fund which may or may not be backstopped by the Fed as the massive IG9 position was not novated but merely transferred) JPM also disclosed something else which may have bigger implications for the broader, and just downgraded, banking sector. As a reminder, in the 10-Q filing, the bank reported a VaR of $170 million for the three months ending March 31, 2012. This compared to a tiny $88 million for the previous year. According to the company, “the increase in average VaR was primarily driven by an increase in CIO VaR and a decrease in diversification benefit across the Firm.” What JPM really meant is that after being exposed in the media for having a monster derivative-based prop bet on its books, it had no choice, as it was no longer possible to use manipulated and meaningless risk "models" according to which the $2 billion loss, roughly 23 sigma based on the old VaR number, was impossible (ignoring that VaR is an absolutely meaningless and irrelevant statistical contraption). Turns out it is very much possible. Which brings us to the latest quarterly Office of the Comptroller of the Currency report, and particularly the chart on page 7. More than anything it shows what happens when a big bank is caught red-handed lying about its risk exposure. We urge readers to spot the odd one out.

Goldman got those positions in last week, just like BoomBustBloggers did, and now its time to tell the muppets to help drive the prices down??? Paranoid conspiracy theory or just plain fact?

Only when the lack of visibility on forward revenue and earnings was obvious to all did Moody's act

Here we come:

• MOODY'S CUTS 4 FIRMS BY 1 NOTCH
• MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES
• MOODY'S CUTS 1 FIRM BY 3 NOTCHES
• MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S
• MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3
• MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S
• MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S
• BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG

So the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley's Gorman (potentially with Moody's investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.

From Bloomberg citing CNBC, which apparently is where Moody's leaked all its data

• MOODY’S TO UNVEIL BANK DOWNGRADE AT 4PM: CNBC
• CNBC SAYS B OF A L-T DEBT RATING TO BE CUT BY 1 NOTCH BY MOODYS
• CNBC SAYS CITI, JPM AND GS L-T DEBT RATING WILL BE CUT 2 NOTCH

So... this leaves Morgan Stanley with the dreaded 3 notch cut which automatically springs up to $9.6 billion margin calls and memories of AIG? Assume crash positions.

Even as Moody is now about a week late on its Spanish bank downgrade where the banks are rated higher than the sovereign (which obviously is kept in check to prevent yields on bonds from soaring even more), here comes the next wholesale bank downgrade:

• Moody's expected to announce ratings downgrade for UK banks this evening - Sky Sources
• Exclusive: Big news - I'm told Moody's will announce downgrades of some of world's biggest banks, incl in UK, after US mkts close tonight. - Sky's Mark Kleinman

Looks like that fabricated 2 notch Margin Stanley downgrade (because 3 notches just won't do - those 4 months of Gorman-led "negotiations" made that painfully clear) is about to strike. The real question is: What Would Egan Who Do?

In 2/08 I called Morgan Stanley "The Riskiest Bank on the Street!". It promptly collapsed! I believe I was the only one to publicly make such a bearish proclamation. Well, here we go again...

• Greek radical leftist SYRIZA leader Tsipras says will not join coalition government (as expected)
• Egypt Islamists claim presidency as army tightens grip (Reuters)
• French Socialists vow reforms after big poll win (Reuters)
• Greeks Back European Bailout (WSJ)
• France, Socialists Win a Solid Majority (WSJ)
• Denmark Warns over Pressure on Krone (FT)
• Obama to press Putin on Syria at G20 amid skepticism (Reuters)... Putin to smile
• China Home Prices Fall in Record No. of Cities (Bloomberg)
• Europe Gets Emerging Market Crisis Ultimatum As G-20 Meet (Bloomberg)
• Wolfgang Münchau – What Happens if Angela Merkel Does Get Her Way (FT)

Four months before the election. And yet, a horrendous migration across the Pacific