Morgan Stanley’s Facebook curse
As Morgan Stanley’s retail force is learning, it’s hard being the anointed one. To most of the world, Morgan Stanley got the plum job of lead manager for the most important public stock offering since Google in 2004. But among the retail sales force at the firm, the Facebook Blessing might as well be known as the Facebook Curse.
The refrain from Morgan Stanley’s rank and file: The IPO of the decade is a lose-lose proposition. That’s because retail investors as well as smaller institutions are likely to be disappointed with their Facebook allotment. Institutional players know how things roll, but for the retail brokerage force, the situation is particularly vexing. Many clients assume that because it is a lead underwriter, Morgan Stanley brokers are on the inside track. That’s true, but means less on a popular IPO like Facebook’s. Financial advisers in the lead group, which also includes Goldman Sachs and JPMorgan, do have an edge over the 30 other investment banks tasked with distributing shares. But it’s not much of an advantage. Global demand for the $11 billion in shares appears to be much bigger than the deal itself. Institutional salespeople at Morgan Stanley are already warning clients that they expect the deal to be 20 times oversubscribed, one source explained to me.
It’s always been the case that only a thin sliver of retail investors would be able to get hot IPO shares. They were typically high-net-worth clients who reliably invest in every single IPO that would come their way – hot or not. Shakier deals, of course, were always available to retail clients. In its heyday, Lehman Brothers brokers used to say that some of the mediocre IPOs they pushed were from the “institutional waste basket.”
Over time, retail investors have been even less likely to win any meaningful amounts of shares in hot IPOs. That’s in part because fewer companies are going public. Meanwhile, institutional investors have grown bigger and bigger – which means that they need a bigger slice of a new issue if it is to have any impact on portfolio performance. The most recent super-hot, social-media IPO, LinkedIn, went to a remarkably few number of institutions, my sources tell me.
These facts don’t do much for morale at Morgan Stanley, which announced earlier this year that advisers who have produced less than $500,000 per year in gross commissions would not get any shares in IPOs – that is, they don’t get to share in the syndicate for Facebook. That was just before Facebook announced its plans to go public. Talk about timing. Morgan Stanley’s joint venture with Smith Barney has not been the smoothest; adviser count has dropped 5 percent in the past year; this year alone, the firm lost at least 87 advisers who managed about $7.2 billion in assets. The Facebook deal is adding oil to that simmering fire. One broker at another wirehouse told me disaffected Morgan Stanley clients have announced that they will move their accounts to him if they don’t get any Facebook shares.
Meanwhile, another Morgan Stanley broker complained to me that even marginal clients are trying to ingratiate themselves with him in the mistaken belief that they can get a piece of the Facebook IPO from him. The joke’s on them. He doesn’t expect to get any shares. Even big producers who are confident that they can get some shares are bracing for flak because they are unlikely to get enough to satisfy client demand. Some are hoping that the firm will bend some rules by factoring in client account sizes, not just broker gross commissions, as a basis for handing out the prizes. This would widen distribution to large clients whose brokers aren’t usually part of the syndicate group.
Morgan Stanley stumbles in rough trading
Morgan Stanley has paid a steep price for trying to trade its way through tough markets and has failed to reap much of a reward.
In contrast to rivals Goldman Sachs and JP Morgan , which have both been reducing the amount of risk they hold in their trading book, including for commodities, Morgan Stanley has kept trading risk at a high level in a bid to catch up after falling behind in 2008-2009.
Its daily value-at-risk (VaR) allocated to commodity trading averaged $32 million in the third quarter, up from $29 million in the second and $27 million in the first. Commodity VaR was the highest for the bank since the three months ended August 2008.
Morgan Stanley has been pursuing the opposite strategy to its archrival in commodities in recent years. In 2009 and early 2010, while Morgan Stanley cut commodity VaR sharply, Goldman was boosting its own risk allocations. Now that Goldman has begun to trim commodity VaR, Morgan Stanley has raised its own risk profile.
The decision to expand commodity VaR reflects a broader increase in risk appetite across the bank’s trading book. Firm-wide VaR net of diversification effects rose to $142 million in Q3 from $139 million in Q2, and $143 million in Q1. Firm-wide VaR is up 20 percent compared with the same quarter a year ago. In contrast Goldman has cut VaR by 40 percent.
But more risk-taking has not yet translated into higher profits. Morgan Stanley’s net revenue from trading slumped to just $1.4 billion in Q3, down from $3.4 billion in Q2 and $3.4 billion in Q3 2009.
Trading efficiency has fallen. Morgan Stanley generated $15.90 of net revenues for every $1 of average VaR in Q3 2010, down almost half from $29.60 in Q3 2009. In contrast, Goldman Sachs has kept trading efficiency at around $32-33 of net revenues per $1 of VaR.
Morgan Stanley commods risk hits post-crisis high
John Kemp is a Reuters market analyst. The views expressed are his own.
Morgan Stanley reduced the amount of risk-taking in its trading book last quarter, but only marginally, and boosted risk in commodities to its highest level since the financial crisis struck in summer 2008, according to the firm’s earnings release.
Morgan’s relatively high appetite for trading risk sets up an intriguing contrast with Goldman Sachs, the other leading commodity bank, which cut risk aggressively across most asset classes, including commodities, in the three months April-June. Morgan Stanley cut firm-wide value-at-risk (VaR) to an average of $139 million per day, down just 2.8 percent from the first quarter’s $143 million, and slightly up from $132 million in the same period a year earlier. In contrast, Goldman cut firm-wide VaR more than 15 percent in April-June compared with the previous quarter.
Morgan Stanley boosted the VaR allocated to commodity risk slightly from $27 million to $29 million, while Goldman slashed its own commodity exposure from $49 million to $32 million. Goldman and Morgan Stanley have traditionally dominated commodity trading. But in recent years Goldman’s commodity exposure has outpaced its rival, in line with Goldman’s greater appetite for trading risk. The contrasting performance in Q2 2010, with Goldman taking risk off while Morgan Stanley continued to boost it, suggests the gap might be starting to close.
It is part of a broader reshuffling. The commodity trading business is being reshaped. Instead of the traditional top tier (Goldman and Morgan Stanley) and as many as six banks following in a second tier, trading is increasingly consolidating around four or five bulge bracket banks, with Barclays Capital <BARC.L>, the combined JPMorganChase-Bear Stearns-Sempra and Deutsche Bank bidding aggressively for a place in the top tier, followed by a host of smaller more niche operations and some increasingly large independent traders.
Banks’ exposure to the Obama Plan
President Barack Obama’s proposals to ban banks from proprietary trading unrelated to serving their customers will have a very uneven impact on the sector.
There is no easy way to identify how much money the major banks make from proprietary trading rather than market-making, brokerage and hedging services on behalf of their customers. The banks do not break out their activities in this way, and the regulators do not collect standardised data.
But it is possible to identify which banks depend most heavily on trading rather than investment or commercial banking activities, and which are therefore potentially most exposed to a tightening of the regulations to prevent proprietary trading unrelated to serving their customers.
The attached charts (see here and here) show the 20 largest banks in the United States by average assets and the share of their adjusted operating income derived from trading activities in the first nine months of 2009. The numbers are taken from the Form Y-9C Consolidated Financial Statements which banks themselves file, published by the Federal Reserve in the form of Bank Holding Company Performance Reports (BHCPR), and used by federal bank supervisors:
Of the biggest banks, Goldman Sachs (55 percent) and Morgan Stanley (36 percent) depend far more than the others upon trading for the lion’s share of their adjusted operating income.
Other significant traders are Barclays U.S. (18 percent) and Deutsche-Taunus (17 percent), followed more distantly by Bank of America (12 percent), JP Morgan Chase (12 percent), Citigroup (9 percent), Bank of New York-Mellon (8 percent) and State Street (7 percent).
In contrast, the top 77 banks (with over $10 billion of assets each) derived on average just 2.5 percent of their operating revenues from trading, according to the Federal Reserve’s peer group statistics.
This time, CIC raises Morgan Stanley stake
– Wei Gu is a Reuters columnist. The opinions expressed are her own –
America may have fallen out of love with Wall Street, but China hasn’t. That’s one way to read CIC’s just-announced $1.2 billion investment in Morgan Stanley — funds that allow the investment bank to repay Tarp money to the U.S. Treasury.
This looks to be an aggressive vote of confidence in the beating heart of U.S. financial capitalism.
Up to a point, but it is also a defensive move.
The truth is that CIC is kicking itself after turning up a chance last autumn to become Morgan’s main shareholder at a rock bottom price, letting in Japan’s Mitsubishi UFJ which bought a big stake at prices which now look sensible.
CIC is not in such a happy position. It bought $5.6 billion of Morgan Stanley convertible securities with a conversion price of $48 to $57 in 2007. When Morgan Stanley’s shares slumped to only a quarter of that price last September, the then beaten-down bank asked CIC to plough in more money.
Facing a big backlash at home for big paper losses on its investment in private equity firm Blackstone and also the Morgan Stanley stake, CIC demurred.
Myths around China’s revitalization plan
– Wei Gu is a Reuters columnist. The opinions expressed are her own –
China investors should care about three major numbers this year: 8 percent economic growth, its 4 trillion yuan ($586 billion) stimulus package, and the 10 industries revitalization plan.
The first is the government’s economic growth target and the second is a spending plan to shield the economy from the global financial crisis.
A lot has been said about the first two numbers, but not enough about the third. Indeed, there are at least three misunderstandings about the latter.
First, perhaps misled by the word “revitalization,” many people talk about the plan as if it is another set of recovery measures to boost investment demand. On the contrary, it mostly contains policy measures aimed at reducing supply.
Thus, there is little reason for investors to be disappointed if their favorite sectors, such as property, are not included.
The 10 industries consist nine sub-sectors of manufacturing and one service sector related to that, logistics, which have all been hit hard by the collapse of overseas demand.
Let’s see if China can control and overcome this crisis, semms to me that if it does, it’d be intersting looking more closely how governments can play more roles in the markets dinamics, not only regulating, but combining it with the self-regulatory mechaninms that capitalims does.
