The independent securities firm model comes under siege as Morgan Stanley and Goldman shares took a beating today. From Bloomberg:
Morgan Stanley and Goldman Sachs Group Inc., the biggest U.S. securities firms, tumbled the most ever in New York trading after a government rescue of American International Group Inc. failed to ease the credit crisis. The cost to protect against a default by the banks rose to a record.Goldman fell as much as 26 percent on the New York Stock Exchange and Morgan Stanley plunged 44 percent, leading financial stocks to the lowest level in four years.
“They’re fish in the barrel, the short sellers have them targeted,” said William Smith, whose firm Smith Asset Management Inc. in New York manages $80 billion, including Goldman stock. “Morgan Stanley’s probably going to wind up doing a deal, it’s really a matter of survival.”….
Credit-default swaps protecting against a default on Morgan Stanley bonds rose 220 basis points to 900 basis points, and earlier today traded at 925, according to broker Phoenix Partners Group in New York. Contracts on Goldman climbed 110 basis points to 530 basis points, Phoenix data show. An increase in price for the contracts indicates a deterioration of the perception of credit quality.
The Wall Street Journal story on the Morgan Stanley-Wachovia talks very carefully uses the past tense to describe Morgan Stanley’s and Wachovia’s merger discussions but implies that the rationale for the deal remains live.
Frankly, I don’t get it. It smacks of desperation, and I don’t seen any benefits, save becoming too big to be permited to fail. There are few if any syergies between their businesses. And as one of my Japanese colleagues once observed, “Putting two sick dogs together does not produce a healthy cat.”
Note in particular the discussion at the end of John Mack calling Paulson, Christipher Cox, an Lloyd Blankfein trying to arrest the fall in firms’ stock prices. This again smacks of desperation. The belief (or one might even say hope) is that the investment banks are victims of evil short sellers. The fact that the credit default swaps market has also taken a very dim view of Morgan Stanley siys the decline in the stock is not the result of rumor-mongering or manipulation but a sea change in how major financial firms are viewed. The plunge is due to the perilous conditions in the markets and the questionable prospects for investment banks, which have become increasingly dependent on credit market products and proprietary trading.. Intervention (if it were even possible or permitted) works only if investors are behaving irrationally. It instead appears they may have come to their senses about how dangerous an overlevered financial ssytem is.
From the Wall Street Journal:
Morgan Stanley has held preliminary merger talks with Wachovia Corp. and at least one other bank…..The investment bank, pursuing alternatives to shore up its falling stock price, has also reached out to regulators and large pension funds in an effort to stop short sellers from betting on the stock’s decline.
After Morgan Stanley’s precipitous decline in the last few days, its market value is only slightly above Wachovia’s….The Charlotte, N.C., bank has said it believes losses for Golden West’s “payment option” loan portfolio could eventually reach 12%.
But many analysts believe the losses from that portfolio may exceed 12 %.
“Is it going to be 20 percent? Is it going to be 30 percent?” said Nancy Bush of NAB Research LLC in Annandale, N.J. ….
The firm has said it believes it could stay independent because it doesn’t need immediate funding, but it has also recognized that confidence in an investment bank is a precious commodity that can wither quickly and must be preserved at any cost.
Wednesday, Morgan Stanley CEO John Mack called Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox, as well as Goldman Sachs Group CEO Lloyd Blankfein, to discuss how to stop the rapid decline in the two firms’ share price. They didn’t discuss a merger, but mainly how to stop short-sellers betting on a decline in Goldman and Morgan shares, a person familiar with the matter said.
Walt Pohl 
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Matthew Dubuque
Yes. Indeed these are desperate times. If there weren’t short sellers, there would still be more sellers of stock than buyers on a day like today. I thought that was what efficient markets were all about.
At any rate, perhaps another reason for the very recent suspension of the prohibition of commercial banks funneling IB subsidiaries is coming into view.
What we might see, if things get much worse, is a loosening of regulations limiting foreign holdings in US commercial bank holding companies. That would allow Chinese and Dubai entities to come into play.
Then some of those Chinese and Dubai assets could be funneled into IBs that had been taken over by a commercial bank, such as might happen to Morgan and Goldman in the more dire scenarios.
Whether it is in our national interest to have the Communist Party of China taking a dominant interest in our banking system is of course another matter. But debate will be quite hurried and shallow on the subject.
But this scenario seems to be a plausible inference supported by several recent developments as to an operational “master plan”.
Matt Dubuque