The Great Debate

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.

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 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.

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.

This time, CIC raises Morgan Stanley stake

Wei Gu– 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.

Myths around China’s revitalization plan

wei_gu_debate– 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.