BIG MACK ATTACK
In a move that is rapidly becoming de rigeur on Wall Street, Morgan Stanley became the latest investment bank to go hat in hand to a sovereign investment fund for a cash infusion after posting its first-ever quarterly loss.
To shore up a balance sheet that had another giant hole blown into it with an additional $5.7 billion write-down, Morgan received a $5 billion equity investment from China Investment Corporation, the country’s sovereign wealth fund.
The charge brings to $9.4 billion the total for write- downs this quarter for Morgan – a number sure to be eclipsed when Merrill Lynch announces its results next month.
In the past two weeks, Citigroup and UBS were forced to seek capital infusions from Abu Dhabi and Singapore, respectively, as their mammoth exposure to housing-related securities decimated their balance sheets. In October, China’s government-controlled Citic Securities purchased a $1 billion stake in Bear Stearns.
Earnings-wise, Morgan reported a $3.59 billion loss for the fourth quarter as it came to grips with widespread collapses in credit market liquidity and pricing.
From the Chinese perspective, the move is simplicity itself: The fund gets a convertible preferred security for nearly 10 percent of one of the world’s great financial franchises, whose stock is at a nearly five-year low.
At a 9-percent interest rate, China Investment’s convertible security offers an-almost 500 basis-point spread to Treasuries prior to conversion. A basis point is one-hundredth of a percentage point.
Morgan’s earnings release answered some of the questions that had surrounded the firm since a wave of senior management departures three weeks ago.
The primary question centered on why Zoe Cruz, Morgan’s co-president and the highest-paid woman on Wall Street, was shown the door so rapidly. The answer is almost certainly the fixed- income division’s jaw-dropping $7.9 billion loss. Cruz had helped engineer Morgan’s aggressive push into mortgage securities trading and underwriting.
To his credit, Morgan Chief Executive John Mack – who sources say is safe in his job for now – accepted full responsibility for the shortfall and said he is forgoing any bonus payment for this year.
Shares of Morgan Stanley rose 4.2 percent, or $2.01, to $50.08 in New York Stock Exchange trading.