Babajide Komolafe
13 October 2008
As the global financial crises bites harder across the world, and governments brainstorming on measures to curtail the crises, the survival of two banking giants Morgan Stanley and Goldman Sachs Group Inc., now hands on the intervention of the United States and equity investment by Japan's Mitsubishi UFJ.
It would be recalled that the on-going crisis since it first manifested last year has consumed about 21 financial institutions in Europe and in America through government bailouts, buy-overs and acquisition.
In recent times, and following the collapse of 158 year old banking giant-Lehman Brothers, there have been growing concern over the health of Morgan Stanley and Goldman Sachs, leading to sharp decline in the price of their shares. To address this concern, Morgan Stanley Chief Executive Officer John Mack, 63, and Goldman Sachs CEO Lloyd Blankfein obtained Federal Reserve approval to become bank holding companies and to raise new capital from private investors.
Consequently, Goldman raised $10 billion on September 24th from Warren Buffett's Berkshire Hathaway Inc. and a public share sale while Morgan Stanley struck an agreement to get $9 billion from Japan's Mitsubishi UFJ Financial Group Inc. The accord is scheduled for completion on Oct. 14th .
This however proved ineffective as the share price of Morgan Stanley dropped almost 60 percent last week, while that of Goldman fell 29 percent. Moody's Investors Service added to the concern about both investment banks on Oct. 10, when it placed Morgan Stanley's A1 long-term rating on review for a possible downgrade and lowered its outlook for Goldman Sachs's Aa3 long-term rating to negative.
However, the announcement of the U.S Treasury Secretary, Henry Paulson that the U.S government plans to buy stakes in financial institutions in a statement yesterday, have renewed hope in the survival of the two banks as they are expected to get cash infusion under the plan.
According to Paulson the U.S. will purchase equity in a "broad array" of banks and other financial firms to restore market stability and ensure economic growth. The Treasury is working on a "standardized program that is open to a broad array of financial institutions," he said.
"Based on the fact that they're allegedly commercial banks now and are moving that way, I think they're likely to get protection," said Benjamin Wallace, an analyst at Grimes & Co. at Westborou, Massachusetts, which manages about $700 million. "Whatever solution they come up with for the banking industry as a whole will apply to them, because they're no longer special."
It would be recalled that last month Paulson, supported by Federal Reserve Chairman Ben S. Bernanke, won Congressional approval to spend as much as $700 billion to buy assets from banks and take equity stakes as part of the so-called Troubled Asset Relief Program, or TARP.
The move followed the bankruptcy of Lehman Brothers Holdings Inc. in mid-September after the government refused to provide money to support a takeover. The Lehman failure foiled debt markets and led to a loss of confidence in Morgan Stanley and Goldman.
"The government can go a long way by buying a stake in Morgan Stanley," said David Killian, a portfolio manager at Valley Forge Advisors LLC, which oversees $650 million, including Morgan Stanley shares and bonds. "Paulson has to follow through on his promises; he and Bernanke went to Congress and said 'we need this TARP facility to protect against ongoing systemic risk' and here we go, put your money where your mouth is."
The U.S. government will support Morgan Stanley and Goldman after Lehman's bankruptcy caused losses in money market funds and led investors to avoid commercial paper, which companies rely on for short-term funding, according to Grimes &Co.'s Wallace.
"The government learned its lesson with Lehman," said Wallace. "You need them to potentially come in and invest in these companies."
Egan-Jones Ratings Co. said Morgan Stanley probably needs to raise $60 billion in new equity to reassure customers and investors. The investment bank has about $900 billion of assets and an equity market value of $10 billion. Mark Lake, a Morgan Stanley spokesman, declined to comment.
"The analogy is a snowball rolling down a mountain; the mass needed to stop that negative momentum increases as that snowball picks up speed and size," Egan-Jones's Sean Egan said in a phone interview yesterday. "Perception trumps reality. They need a massive injection to stop the slide."
The government can't allow financial companies to continue collapsing, Paul Krugman, an economics professor at Princeton University, said in an Oct. 9 interview.
"It's really hard to put humpty-dumpty back together again after those things fail," Krugman said. "The failure to rescue Lehman it turns out was a really big mistake."
Morgan Stanley is selling more than 20 percent of itself to Japan's Mitsubishi UFJ for $9 billion - an amount that nearly equals Morgan Stanley's total market value. The slide in Morgan Stanley shares has led investors to question whether the deal, scheduled to be closed on Oct. 14, will go through as planned.
Mitsubishi UFJ agreed to pay $6 billion for preferred stock and $3 billion for common stock at a value of $25.25 apiece, or 62 percent more than yesterday's closing price. Morgan Stanley and Mitsubishi UFJ have moved to quash speculation that the deal would collapse.
"I would be angry if I were a Mitsubishi shareholder and I got the same amount of Morgan Stanley when the stock has been cut in value," said Kenneth Crawford, a senior portfolio manager at Argent Capital Management in St. Louis, Missouri.
Crawford said he sold his Morgan Stanley stock last month after Lehman went bankrupt and American International Group Inc. was forced to rely on government support to fund itself.
"After Lehman was allowed to go bust and then AIG couldn't come up with the liquidity they needed, all of a sudden it seemed more likely that incredible scenarios could be more credible," he said.
Mitsubishi UFJ would be the second overseas investor to take a significant stake in Morgan Stanley. In December, China Investment Corp. paid $5.58 billion for equity units in Morgan Stanley that pay 9 percent a year and convert to common stock in 2010, granting CIC about 10 percent of the U.S. company.
For Morgan Stanley and Goldman, becoming bank holding companies regulated by the Federal Reserve may "limit profit opportunities," while at the same time lower risks, Moody's Investors Service said when it cut the ratings outlook for both firms on Oct. 10.
Moody's in August cut Morgan Stanley's long_term credit rating from Aa3. At A1, the firm now has the fifth_highest investment grade rating.
The Morgan Stanley credit review affects about $200 billion of debt, Moody's said. The ratings company affirmed its Prime_1 grade for Morgan Stanley's short_term debt. The outlook for Goldman affects $175 billion of debt, and the company's short_term ratings were also affirmed at Prime 1.
"The government is not going to allow this to go the way of Lehman because the repercussions of Lehman have been vast, especially the resulting losses in money market funds," Valley Forge's Killian said.
Be the first to Write a Comment!
Copyright © 2008 Vanguard. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
