Opinion

Felix Salmon

Chart of the day, Morgan Stanley bailout edition

By Felix Salmon
November 28, 2011

stanley.tiff

Ladies and Gentlemen, this is what a lender of last resort looks like. What you’re looking at here are three lines. The black line is Morgan Stanley’s market capitalization, which tends to hover in the $40 billion range but which fell as low as $9.8 billion in November 2008. The orange line is the amount that Morgan Stanley owed to the Federal Reserve on any given day — an amount which peaked at $107 billion on September 29, 2008. And the red line is the ratio between the two: Morgan Stanley’s debt to the Federal Reserve, expressed as a percentage of its market value. That ratio, it turns out, peaked at some point in October, at somewhere north of 750%.

Many congratulations are due to Bloomberg, for extracting this information from the Fed after a long and arduous fight. It couldn’t have come at a timelier moment: if the ECB wants to avert a liquidity crisis, charts like this give a sobering indication of just how far it might have to go, and how quickly it might have to act.

On September 16, 2008, Morgan Stanley owed $21.5 billion to the Fed. The next day, that number doubled, to $40.5 billion. And eight working days later, on the 29th, the bank’s total borrowings from the Fed reached $107 billion. The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.

The Fed likes to say that it wasn’t taking much if any credit risk here: that all its lending was fully collateralized, etc etc. But it’s really hard to look at that red line and have a huge amount of confidence that the Fed was always certain to get its money back. Still, this is what lenders of last resort do. And this is what the ECB is most emphatically not doing. I find it very hard to imagine the ECB lending some random European investment bank €100 billion just for the sake of keeping liquidity flowing.

And it’s frankly ridiculous that it’s taken this long for this information to be made public. We’re now fully ten months past the point at which the Financial Crisis Inquiry Commission’s final report was published; this data would have been extremely useful to them and to all of the rest of us trying to get a grip on what was going on at the height of the crisis. The Fed’s argument against publishing the data was that it “would create a stigma”, and make it less likely that banks would tap similar facilities in future. But I can assure you that at the height of the crisis, the last thing on Morgan Stanley’s mind was the worry that its borrowings might be made public three years later. When you need the money, and the Fed is throwing its windows wide open, you don’t look that kind of gift horse in the mouth.

Every time the Fed fights tooth and nail to prevent certain information from being made public, and loses, there’s a certain feeling of anticlimax: we get the information, and ask what on earth is so dangerous about normal people knowing it. The Fed is one of the most vital and least trusted institutions in America, and there’s a reason why a book called End the Fed is still riding high in the Amazon charts, more than two years after it was published. If the Fed wants to get Americans back on its side — and it needs to get Americans back on its side — then it will have to stop fighting these silly battles against transparency. Especially since the release of this data has a lot to teach the Fed’s counterparts in Frankfurt.

Comments
27 comments so far | RSS Comments RSS

As I recollect being taught in some basic econ classes, a central bank’s ability to affect the economy (during normal inflation controlling times at least) in large part depends on the divergence between the markets anticipation of what it will do and what it will actually do. That if the markets know what the central bank is steering the inflation rate towards, they will factor that into their expectations when making decisions so that “anticipated policy is irrelevant” and what not.

If that holds, then it could be argued that any increase in a central bank’s transparency will let people understand it’s decision making process more, anticipate it’s decisions more, and therefore render it less effective.

My grasp of the above is kind of rusty, but maybe you could investigate more?

Posted by albertsun | Report as abusive
 

Congrats to Bloomberg for having a team working round the clock to massage the same publically available data to try and find an outrage angle.

Posted by Danny_Black | Report as abusive
 

The available evidence strongly suggests that the American people would have no interest in what the FED is doing even if they could see it. Too much good stuff on TV.

Posted by maynardGkeynes | Report as abusive
 

albertsun, one only has to see what happened to NRK when there was a rumour about maybe tapping the BoE for a collateralised loan.

I suspect the real reason the Fed fought to prevent this data being realised is they realised that the long list of morons in the financial “journalism” field would do exactly what they have then proceeded to do. These Bloomberg reporters KNOW what they are inferring is nonsense because it has been pointed out to them over and over again. At some point, they have to stop be “wrong” and simply be called what they are, liars.

Posted by Danny_Black | Report as abusive
 

Fed prefers to act in secrecy and all too often for the benefit of the banks it “supervises” instead of the benefit of the greater economy. We need to end the dual mandate and limit the Fed’s powers to maintaining the monetary policy with a goal toward zero inflation.

Posted by Sechel | Report as abusive
 

Well this is revolutionary. Morgan Stanley borrowed a lot of money after Lehman failed, the Reserve Fund broke the buck, and there was a run on prime money-market funds. Wow.

And let’s do away with Fed secrecy, indeed, *all* secrecy. Post your loans, your prescriptions, your asset plans, your income, your payment history up on Facebook or Google or Baidu. Inquiring minds want to know! There’s no one out there who might misuse the information, is there?

There are good and sound reasons for financial confidentiality. Timing is a debatable issue, but as with diplomacy, military actions, legal issues, medicine, and law enforcement, financial matters need to remain private if full disclosure would harm innocent third parties.

Oh, and BTW Felix, have you examined the Fed’s collateral rules? They are strict. The Fed would not have lost money if MS had gone toes-up. Do a little digging and read them. I think you will be surprised at how well the Fed protects itself.

Posted by Publius | Report as abusive
 

There is no lesson here for Europe.

This is just yet another journalist misunderstanding the meaning of the concept “lender of last resort”.

As Sir Mervyn King, head of the Bank of England recently stated:

“This phrase ‘lender of last resort’ has been bandied around by people who it seems to me have no idea what lender of last resort actually means, to be perfectly honest. It is very clear, from the origin, that lender of last resort by a central bank is intended to be lending to individual banking institutions, and to institutions which are clearly regarded as solvent. And it’s done against good collateral and at a penalty rate…That is a million miles away from the ECB buying sovereign debt of national countries which is used and seen as a mechanism for financing the current account deficit of those countries, which inevitably – if things go wrong – will create liabilities for the surplus countries. In other words, it would be a mechanism of transfers from the surplus to the deficit countries. And that’s why the European Central Bank feels, I think – and with total justification – that it’s not the job of a central bank to do something which a government could perfectly well do itself, but doesn’t particularly want to admit to doing.”

The ECB cannot do the jobs of countries. It is, like any other central bank, a liquidity provider. It cannot backstop states without a fiscal mandate.

In the case of government bonds, this fiscal mandate flows from the state guarantee of perpuity in existence and unlimited taxation.

In the case of sovereign bonds, e.g. the Eurozone, it has to be derived from a fiscal union. This cannot offer a guarantee of perpuity in existence or unlimited taxation. Attempting to “print” would not only at best fool the market for only a little while (because they know it is impossible for it to be unlimited without a fiscal union), but it would also risk destroying the central bank’s own mandate.

Posted by sqz | Report as abusive
 

“If the Fed wants to get Americans back on its side — and it needs to get Americans back on its side….”

But we don’t “need” to be won back over to their side. Distrust of central banks is a sign of health, not a symptom of weakness.

Posted by Christofurio | Report as abusive
 

@Danny_Black: what do you view as false in the Bloomberg article’s sense of outrage; what are they inferring that is nonsense?

Do you agree that below-private-market loans from the Fed are a subsidy to those receiving? Could you elaborate on why you think that private banks that borrow a hundred billion dollars from the Fed should be able to do so in secret, while at the same time assuring their shareholders they need no assistance? Isn’t this accurate, real information that would improve the efficiency of the market?

@Publius: your examples of needed confidentiality are different in that the financial benefits (if any) of those confidentialities don’t tend to directly accrue to private parties demanding the secrecy.

And doesn’t the public tend to know, often almost immediately, the results of all of those others secrets? Isn’t that information feedback critical to upholding the necessity of the secrecies to begin with? We know the details and the outcomes of diplomatic efforts, military actions, and prosecutions – would the public support those institutions if we never found out what happened?

The harm of secrecy might outweigh the benefits, if the secrecy erodes support for the institution. Good tactics by the banking sector, bad strategy by the Fed (to the extent those two are actually separate things)

Posted by SteveHamlin | Report as abusive
 

So, if I understand it properly, the Fed stepped in to provide liquidity to a highly leveraged but solvent institution.

I guess I can understand the outrage over the degree of leverage practiced at the investment banks, but by now that shouldn’t be a surprise to anybody.

The Fed doesn’t take much risk in these actions (they insist on high-quality collateral), and the fact that Morgan Stanley is still solvent proves that their judgment in this case was correct. So let’s not imagine counter-factual fantasies.

The problem with the ECB emulating this is that the European banks are NOT solvent. Writing down the sovereign debt on their books would bankrupt them. Asking the ECB to accept that bad debt as collateral would bankrupt the ECB. You can’t start taking large haircuts on sovereign debt (as happened with Greece) without writing off the capital somewhere else. And I haven’t seen anything to suggest that sufficient capital exists to cover these losses.

Posted by TFF | Report as abusive
 

Anyone who charts Morgan Stanley’s equity market cap v. Fed borrowings is a liar – ho-kay then

Posted by johnhhaskell | Report as abusive
 

I think there’s a case beyond “stigma” for keeping this information secret for a while, but it’s not about incentives for the borrower; it’s about incentives for everyone else. Imagine the bank runs and speculative attacks that would have been launched if the market knew that Morgan Stanley was in hock to the Fed for 7-8 times its market cap. Of course the Fed could fight off such attacks if it wanted to by increasing the pressure on the fire hose. But the point is that if this information were available in real time it would likely cost the Fed a lot more to stabilize MS(and the other banks taking its emergency loans) and establish the credibility to be able do so again in the future if need be. Given the current Fed’s recent actions (or inaction), I think it’s questionable whether the institution would have had the fortitude to assume those costs even in the dark days of October 2008.

Now of course, three years of secrecy is probably much longer than the Fed needs to protect its own efficacy and credibility. Still, I think setting an expiration date for the secrecy of this kind of information is particularly difficult where it’s pretty clear that we are not out of the woods yet, and not likely to be any time soon.

Posted by jnsheff | Report as abusive
 

@jnsheff: Or as Terry Pratchett put it in Going Postal, finance is the principle that the pot of gold is always there at the end of the rainbow, provided no one ever looks for it.

Posted by KenInIL | Report as abusive
 

Felix,

The Eurozone Debt Crisis is the IMF’s Responsibility, not the ECB’s or the Fed’s. The IMF, and not the central bank, is them proper lend of last resort to sovereign countries:

http://www.polycapitalist.com/2011/11/eu rozone-debt-crisis-is-imfs.html

Posted by Polycapitalist | Report as abusive
 

TFF, you don’t understand it properly. sqz’s comment above is completely relevant and also the proper response to slavish Wall St. water carriers such as Danny_Black, above.

I don’t dispute that The Fed should be the lender of last resort. But The Fed, if it was truly only providing liquidity, should have charged a penalty rate, and it didn’t, it provided funds at a rate lower than market. This allowed Morgan Stanley to make a whole lot more profit after the fact than it otherwise would have made.

Posted by Strych09 | Report as abusive
 

Good points, Strych09. I will note that Morgan Stanley was losing money from 4Q08 through 2Q09, but I imagine their losses would have been much higher if the Fed had not subsidized their borrowing for a few months.

Note also that their share price is back to levels not seen since 4Q08 and their market cap is down to $25B (despite a round of capital raising). The Fed’s action may have saved the bank, but it didn’t save a whole lot of value for the shareholders.

Posted by TFF | Report as abusive
 

@ polycapitalist: the original purpose of the IMF was to intervene only when countries began to experience severe trade imbalances. An egregious case of ‘mission creep’..

Posted by crocodilechuck | Report as abusive
 

SteveHamlin, it wasn’t secret. As has been pointed out in the numerous other times these “journalists” have written essentially the same article, these programmes were publically announced AT THE TIME with details of the amounts borrowed. Anyone who claims those programmes their purpose or the amounts or rates is or was a secret is a flat out liar. The first time these “journalists” wrote this BS, they might just be too ignorant to know what they are talking about but it has been corrected, there is simply no way they do not know that these “secret” loans were in fact not secret at all. Not only that but as a reader of this blog you should be aware of this too.

How were the rates “below-market”? Show me instances of where MS borrowed from the FED with particular collateral with particular haircuts were the rate was lower than the deal they would have got in the private market. We went through this when Bloomberg first posted this BS – where incidentally they showed what dishonest lying scum they were by adding up all the overnight loans rolled over and claiming it was one big loan – and even if we assumed the collateral was worth nothing, that during that period LIBOR stayed at its upper bound and the interest charged to MS stayed at it lower bound then the “subsidy” to MS was less than a couple of hundred million and that is an absolute UPPER bound. If someone did the calculations more precisely I would happy bet it comes in at a few million tops.

johnhhaskell, as someone who wouldnt spot the truth if it nutted him, I am not surprised you find this rehash of old stories convincing.

Strych09, see above. One case where the same loan under the same conditions was lower than the market. Just one.

Posted by Danny_Black | Report as abusive
 

“How were the rates “below-market”? Show me instances of where MS borrowed from the FED with particular collateral with particular haircuts were the rate was lower than the deal they would have got in the private market.”

Danny_Black, why would MS borrow from the Fed at a HIGHER rate than they could have had elsewhere? That suggestion makes no sense whatsoever.

My guess is that in the uncertain environment at that time, the private market was demanding larger haircuts than MS could afford to give. The Fed offered them better terms, thus they took the Fed’s deal.

I’m open to alternative explanations, however, as long as they don’t involve MS voluntarily preferring higher-rate borrowing to lower-rate borrowing.

Posted by TFF | Report as abusive
 

TFF, remember this was a timeframe when t-bills were yielding a negative amount so normal economics went out the window. Why borrow from the Fed, a) they could roll the debt and you were guaranteed to be able to borrow vs hunting around in the market, b) the market at the time was freezing up, so there was difficulty borrowing at ANY rate and c) those who were lending were taking treasuries and the like as collateral.

What i suspect the dimwits at Bloomberg have done is compare the rate to the Fed funds rate or Libor which is an UNCOLLATERALISED rate.

Posted by Danny_Black | Report as abusive
 

TFF also with some of the Fed programs the dealers are REQUIRED to participate. The most famous case of this being when GS was the only person to bid at an auction and got a loan for 0.1%( possibly 0.01%) which was turned into a huge fake scandal at bloomberg and the cut and pasters.

Posted by Danny_Black | Report as abusive
 

Danny Black
In your response to TFF you yourself acknowledge that MS could not borrow in the private sector “.. there was difficulty borrowing at ANY rate…”.

If MS couldn’t borrow at ANY rate in the private markets access to Fed lending at ANY rate is a rate lower then the market rate. How is this not a subsidy to MS?

Posted by chris9059 | Report as abusive
 

Danny_Black, the concept of “market rate” presumes a market. I’ll believe you that the market at that time was thoroughly frozen — but this is effectively an admission that the Fed loan was on terms that the private market was unwilling to match.

I don’t personally have a problem with that, as long as it doesn’t involve the Fed taking risk (they are pretty good about that) and is only used in a liquidity crunch. Doesn’t do anybody any good to let all the banks fail (and they would all have failed if the Fed hadn’t stepped in).

Posted by TFF | Report as abusive
 

albertsun: No, you have it exactly backwards. In order to affect the economy, a central bank needs to be able to persuade people that it will consistently achieve whatever target it declares it wants to achieve. See this old Krugman item: http://web.mit.edu/krugman/www/babysit.h tml

Notice in particular the footnote explaining how a central bank can, in theory, help get out of a liquidity trap by “credibly promising to be irresponsible” (i.e. setting a higher inflation target that is promsed to last for at least a few years beyond when the liquidity trap is escaped, and persuading people that they REALLY WILL maintain higher inflation over that period).

Here’s a more recent take on the topic:
http://krugman.blogs.nytimes.com/2011/03  /18/credibility-and-monetary-policy-in- a-liquidity-trap-wonkish/

Posted by Auros | Report as abusive
 

The US FEDERAL RESERVE BANK is a foreign criminal private enterprise that hijacked this country in 1913 and has since orchestrated the incredible deficits, inflation, deflation and destruction of the middle class.

The deceitful marketing has been designed to present a facade of legitimacy. Its buildings look like federal institutions. But it is no more federal than federal express. Every fiat dollar the FED creates out of thin air is a debt that we pay interest on to the private criminal FED mafia owners.

These FED mafia owners control all of our branches of our government and the media whores that hide the scam from public view. The FED IS THE MILITARY INDUSTRIAL COMPLEX that sucks wealth from the private economy through the promotion, and perpetuation of continuous WARS and the borrowing costs that are like blood to a vampire. The FED feeds on the misery of others.

It is unelected, unaccountable, unrepentant and IS the enemy of a free society. Ladies and gentlemen WE DON’T CONTROL OUR MONEY so WE ARE SLAVES TO A HOSTILE FOREIGN TYRANT.

Posted by woohooman | Report as abusive
 

Chris,

You correctly state the original charter of the US Fed but the practical application of the Fed is much more broad. The Fed along with Goldman and the revolving door of the US TSY effectively drive the economy like a Soviet central planning office picking corporate winners and small business losers regardless of impact on national competitiveness. All major economic decisions are approved or vetoed by the Fed due to the magnitude of the Feds influence.

Small innovative US Businesses are like Soviet infantry at Stalingrad. No support except for “blocking forces” that shoot small businesses that buckle under bank created short term credit fluctuations. The banks then blame small business and join Republican forces that suggest they are simply thinning the herd of less fit organizations. Small business is by nature less fit and apparently Too Small to Succeed under the banker class tyranny.

The American Private Management Team behind the Fed have configured a “Too Big to Fail and Too Small to Succeed” economic regime on par with Joesph Stalin. This is one troop that isn’t dead yet.

Take some liberal arts night courses and read your history MBAs. National planning is outside your scope of management and math skills.

73% Republican 27% Democratic Responsibility http://goo.gl/ZGvnx

Posted by economicgps | Report as abusive
 

“The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.”

The United State’s central bank, “the Fed”, has a very strong motive for lending to its member banks as much as they want to borrow. The member banks own all of the common stock shares of the Fed! And the member banks receive an enviable 5% fixed annual dividend rate on their investment. And they essentially choose all the Fed directors, although they play a charade of recommending their choices to the U.S. President first. No wonder the Fed “kept on lending, as much as it could, to any bank which needed the money”.

Posted by Feynman | Report as abusive
 

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