A Morgan Stanley Eye View of The Market, Or…What, Me Worry?
Posted by keithburwell on 08/7/08 in Keith Burwell, mortgage, mortgage news
I noticed two articles in the last 24 hours that when read separately are noteworthy, but when read together, become somewhat duplicitous. Early yesterday morning, Bloomberg had an article indicating that Morgan Stanley has decided to freeze thousands of home equity accounts within their portfolio. This is not wholly surprising, nor is it unprecedented. Other large banks have done this previously during the last year, and many homeowners have no access to their equity because of rapidly declining property values across the country. So read alone, this story, doesn’t seem to be troublesome.
However, when read together with this Mortgageloan.com coverage of Paulson’s use of Morgan Stanley for Fannie, Freddie advice, gives cause for concern. While the original article indicates that conflicts of interest could occur, there is no getting around it in order to obtain professional assistance, according to the Treasury spokesman.
Really? There are no consultants who understand the financial market? There are no retired analysts, willing to roll up their sleeves to work on this project? No banking oversight committee like the OFHEO, OTS, or FDIC? We are to understand that the most qualified group to assist the GSE’s is another company that is rumored to be failing on a number of levels. Given the condition of the markets, the reputation of Wall Street firms and investor confidence, don’t you think the Treasury could have made a somewhat better choice with a bit less skin in the game, as they say?
Doubtful that I will get the contract changed or wrestled away from Morgan Stanley, so I think what we now need to do is understand Morgan Stanley’s position in the market. They have gone from simply another struggling firm to now leading the market in the way it will react to the unraveling of the CDO market. Why? Are we to believe that as Morgan Stanley sifts through the capitalization of the GSE’s and becomes the CSI investigators, they will not use this information to ensure their own solvency?
I believe that we can safely say that as Morgan Stanley acts, so will the remaning market. Home equity freezing is the bleeding edge of what they see on the horizon. So rather than complain about conflict of interest, poor choice by the Treasury department, whiffs of collusion and insider information, let’s just ask Morgan Stanley— “so…what’s next?”
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jon | Aug 7, 2008 | Reply
You omit an important element of this story that goes directly to the assumptions - Morgan is freezing only those lines that are secured on already severely depreciated assets. IOW, folks whose homes have depreciated far enough to cause the underlying asset to be worth less than the line of credit.
While it’s possible that Morgan may have come into possession of material information relating to the market at large, use of such information to make trading decisions like this would be improbably short-sighted. Give Mack some credit. He’s not going to go out and make Firm direction based on something Paulson told him over dinner when it is all over the news the next day. If there’s collusion, which I doubt (Mack is as straight a shooter as they come), it will be sufficiently subtle that a cursory corelation of article keyword matches from the news will not uncover it.
keithburwell | Aug 7, 2008 | Reply
Jon–I agree with your point. I don’t think it is a conspiracy as much as I believe it to be a poor choice by Paulson for PR reasons, as well an appearance of poor judgment. If we can’t expect our oversight organizations to perform these kinds of actions, what then are they in place for? And, overall, is this the right approach by the Treasury? I would argue that it isn’t. The public’s understanding is that Wall Street cannot unravel their own derivatives and CDO’s. So why are they being hired to unravel the GSE’s?