New republic: your work tax, Wall Street style.
When we left Morgan Stanley, the company was taking various forms of abuse to tamper with the biggest IPO of the millennium. Alas, it proved to be the least of its problems. More urgent is the fact that, moody’s may be greatly reduced, Morgan Stanley’s bond rating, which may make the company lose billions of dollars (probably tens of billions of dollars of collateral and increase the cost of borrowing.
Then yesterday’s “financial times” brought even worse news. In order to save some cash when downgraded, Morgan Stanley, hope most of its $52 trillion derivatives portfolio put inside its bank subsidiary manufacturer – the company is the old part of the loans, rather than a hedge fund or investment bank. The reason for this is that it lowers the cost of borrowing, or the cost of borrowing rises when credit ratings fall. Why is that? Because being a bank means you have a lot of customer deposits, most of which are insured by the federal government, and you can get really cheap loans from the federal reserve. For example, if you suddenly in your derivatives bets made billions of dollars of money laundering, uncle Sam will be there to absorb losses, or at least help you to manage them, and the bondholders lend you the money won’t feel the pinch. And, of course, the bondholders know in advance, that’s why they might borrow money at a reasonable interest rate first. So borrowing costs are low.
It sounds like a clever plan – just let the taxpayer subsidise your riskiest part! And it is. As Britain’s “financial times” points out, most American rival Morgan Stanley, Goldman sachs, one of the most important to have in their bank subsidiary has its derivative accounts for 90% of the (today, Morgan Stanley is only 3%).
Unfortunately, Morgan Stanley’s people cannot rest. As they were about to follow trough and the federal government, the federal government of the federal bureau of investigation (may is probably the FDIC, the insurance fund will pay for these losses) decided to taxpayer standing between bondholders and trillions of dollars in derivatives bets may not be the world’s greatest ideas. According to the FT:
These programmers have not been ruled on these requests. Complicating matters is the need for the fed to formally negotiate with the federal deposit insurance corporation in a much longer process introduced by the dodd-frank financial reforms.
Morgan Stanley as financial group and want to maintain the stability of the wider financial system of the federal reserve and the federal deposit insurance corporation have different requirements, the worry is the protection of bank deposits.
I am very serious about doing a lot of work for dodd-frank in the past two years. But if what it does is to stop such demons, there is clearly something to be said. On the other hand, if the fed succeeds in this — the fed is known for trying to shield bondholders from losses — it will prove to be a truly worthless piece of legislation. I don’t hold my breath.