Tuesday, November 25, 2008

Morgan Stanley and Short Selling

This article in the Wall Street Journal reports on short selling regarding Morgan Stanley in September. Recall that CEO John Mack attacked short sellers for what happened to the stock price, and was instrumental in getting the SEC to initiate the short selling ban. The interesting tidbit in the article is that hedge fund clients of Morgan Stanley reacted by pulling their funds out as revenge:
But within days, more than three-quarters of Morgan Stanley's roughly 1,100 hedge-fund clients had put in requests to pull some or all of their assets from the firm, according to a person familiar with the operation. Even though most kept some money at the firm, Morgan Stanley couldn't process all the withdrawal requests at once, adding to market fear.
As Felix Salmon argues the notion of a bear raid on Morgan Stanley does not hold water. The cost of insuring against Morgan Stanley default increased because investors needed to hedge, not because of a bear raid. Two months later the cost of insurance is down but the stock is still in the doldrums. As Salmon notes:

Even now, after yesterday's massive rally and a further uptick this morning, Morgan Stanley stock is trading at less than $15 a share. Clearly the stock price is not being driven down by manipulative speculators taking advantage of an illiquid CDS market to sour sentiment.
What I wonder about is how much the loss of business caused by the attack on short sellers cost Morgan Stanley.

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