Earlier today some blog pulled up some factual data that suggested that Morgan Stanley had $39 billion in total exposure against French banks at the end of 2010, up $30 billion from the year prior, and enough to wipe out its entire market cap and then some should French banks be pulled under. Sure enough, the stock tanked even though as CNBC pointed out "there was absolutely no news." Since then, first Credit Suisse defended Morgan Stanley for its "European exposure" (we wonder how long before Morgan Stanley returns the favor and has to defend Credit Suisse for its US exposure: judging by Credit Suisse's maximum outlier 3M USD Libor rate, not too long). And now it is bank #2's turn, in this case Alliance Bernstein, whose conclusion is that "we estimate that total risk to France and its banks is less than $2 billion net of collateral and hedges." Ah yes, collateral and hedges, which, lest we recall incorrectly, did miracles when Lehman blew up and the very fabric of net hedging offset was threatened when the viability of the initiator in the "gross" CDS chain was put into question (thank you AIG). Naturally, if and when the 3 Big French banks go down, everyone will be perfectly normal and have no problem netting of hedges. Naturally. As for the coup de grace in the AB report, it is this piece of rhetorical brilliance: "Over the last six months, there have been 5,600+ articles published by the press on the subject of "French Banks" and "Credit Risk". We believe Morgan Stanley's risk management staff and its trading units are fully aware of the highly publicized risks emanating from Europe and warnings about the firm's potential exposure to a European Sovereign crisis." And there you have it: just because everyone is aware the bank is doomed, means the bank is ok. See, this is nothing like the logic that comedy entertainment icons such as Cramer and Dick Bove used to endorse Bear and Lehman days before both imploded. Then again, the downside for AB to actually tell the truth is substantially higher (as in contagion which takes down the entire banking system, AB included), than the upside from, well, prevaricating. As for abovementioned blog, we are just waiting for the third bank to come to Morgan Stanley's defense to know it was 100% correct.