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MORGAN STANLEY NOT OUT OF THE WOODS YET

By
Mark DeCambre
Published Oct. 3, 2008, 8:40 a.m. ET

Morgan Stanley is rejiggering portions of its business, including scaling back its prime-brokerage operation, as it wrestles with a rapidly changing Wall Street landscape, sources tell The Post.

According to people familiar with the matter, the firm also is aiming to purchase a retail-banking franchise and/or work out a way to piggyback on to the $1.3 trillion deposit base of Mitsubishi Bank UFJ, the Japanese banking titan that recently took a 21 percent stake in Morgan Stanley for $9 billion.

Morgan Stanley’s move to scale back its prime-brokerage shop, which caters to hedge funds, follows massive outflows in recent weeks that have led the firm to lose more than one-third of its hedge-fund clients.

Morgan Stanley, along with rival Goldman Sachs, have been trying to combat the Wall Street worries about their futures that have had a withering impact on their share prices and borrowing costs.

Details of Morgan Stanley’s plans are still fluid, and sources said the firm was considering a number of moves to fix itself, including selling assets as well as buying a faltering regional bank.

For Morgan Stanley, the stakes are high. Despite the Mitsubishi investment, the bank still faces high costs associated with its credit-default swaps. While the spread on Morgan Stanley CDS has fallen from a staggering 1,435 basis points, it’s still high at 975 basis points. A CDS spread of 350 basis points generally implies a company is at risk of going bankrupt.

Among the options Morgan Stanley is exploring is trimming its $998 billion balance sheet and exiting, or scaling back, from businesses that use a lot of the firm’s balance sheet but don’t provide high returns. That includes prime-brokerage as well as the trading of corporate bonds and high-yield debt.

As it stands, Morgan Stanley’s Tier 1 capital ratio, a measure of a bank’s financial health, is about 14 percent – a figure nearly twice as high as most federal regulators require.

Nevertheless, the credit crisis and wave of bank and brokerage failures has driven deep-seated fears into the hearts of many investors.

Reps at Morgan Stanley and Goldman refused to comment.

Shares of Morgan Stanley fell 5 percent to $23.21, while Goldman shares fell 2 percent to $131.54.