Tech & Biz

Morgan Stanley, Goldman Sachs and HBOS: Caught in the Mortgage Quagmire

by Jordan Yerman | September 17, 2008 at 08:20 am

385 views | 8 Recommendations | 3 comments

More large financial institutions are getting mired in the bog of the morgage crisis, including US institutions Morgan Stanley and Goldman Sachs, and UK mortgage lender HBOS.

Shares of the two largest U.S. investment banks, Goldman and Morgan Stanley, fell 11 percent and 16 percent respectively in early trading, even after both reported better-than-expected earnings on Tuesday.

The cost of protecting their debt spiked, reflecting investor fears that their debt issues are no safer than junk bonds. Both are currently rated investment grade.

Goldman Sachs is putting on a brave face, despite a precipitous drop in profits, its worst in nine years.

Goldman Sachs has rejected predictions of the death of the traditional Wall Street business model, in spite of the worst slump in the investment bank's profits since it went public in 1999. Third-quarter earnings dived 70% to $810m (£450m) as the credit crunch crippled financial markets and the firm's usual flow of advisory fees on corporate deals evaporated.

(I used to do some contract work for Goldman Sachs, performing and taping mock interviews for their HR staff. The lunchroom in their Maiden Lane building, just off Wall Street, was beyond my vagabond dreams at the time)

Meanwhile, a spokeswoman for Morgan Stanley has denied that the investment giant was in merger talks, and CFO Colm Kelleher stated that the market flux is temporary and that Morgan Stanley will weather the storm.

“If the market fully decides that you need deposits, then it’s decided.”

He clearly thinks the market is wrong and is hoping it changes its mind about Morgan Stanley by stressing the company’s balance sheet and its leading position in the investment banking business. “We need these markets normalize,” he told analysts Tuesday night. “Frankly, I believe this nonsense will end.

“Our view is that being an independent bulge-bracket investment bank with diversification is a winner through the cycles,” he said. “We’re fleet with capital and fleet with resources.” He added that they have “no interest at this point” in a commercial bank.

All of Morgan Stanley's public statements assert that it will remain an independent broker-dealer, and not merge with a commercial bank, even as it feels the pain of dropping share price.

Morgan Stanley shares closed down 10.8 percent at $28.70 on Tuesday, having fallen 46 percent so far this year.

Across the pond, UK bank HBOS got caught in the pinch as well. Of Britain's biggest banks, HBOS focuses the most on money markets, and so saw its shares drop by up to 40% during the past two days, though those prices managed to regain some lost ground as word of merger talks with Lloyds TSB emerged.

Wednesday morning’s events were unbelievable. Shortly after the markets opened at 8am HBOS shares were around 200p. By 9am they had sunk to 88p as rumours circulated that it may have difficulty renewing some of its funding.

Then an item appeared on Robert Peston’s blog (he’s the business editor of the BBC who also broke the Northern Rock story) saying that Lloyds TSB (LSE: LLOY) and HBOS were in advanced merger talks which would lead to a takeover of HBOS at close to 300p per share.

Finally, at 1:25pm HBOS confirmed that was in talks with Lloyds TSB but gave no details of what form the deal might take. A further announcement with full details could come either later today or first thing tomorrow.

A world finance map is visible here (be careful if you're sensitive to the color red). We're following the microblogs on our US Economy Channel's Scan.

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SOLARLIFE

flagged this story as Good Stuff

at 08:56 on September 17th, 2008

jordan, I like this story. What a summary "Goldman Sachs has rejected predictions of the death of the traditional Wall Street business model" As I predicted the classic Wall street investment bank is dead. , so... worthless Christmas profits of Goldmann and Sachs finally exposed to Lehman disaster. I will need some time to check the many statements; thanks for quality research

In crisis times like this, I would vote to bring this article as front page story. The trouble with Tech & Biz, I know. In this case it is not the quantity of readers, it is more the quality to present the interdependance of wall street, later seen as a milestone. At the moment the wall street V8 is running on 6 cylinders, but what you describe soon on 3 cylinders, a tough ride. Or as economists say, is the Future predictable

Emilio Lizardo

flagged this story as Good Stuff

at 08:48 on September 17th, 2008

Morgan Stanley, Goldman Sachs Shares Plunge After AIG Takeover

Sept. 17 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley, the two biggest U.S. securities firms, tumbled the most ever in New York after a government rescue plan for American International Group Inc. failed to ease the credit contraction.

Markets are reacting to "rumor and fear," Colm Kelleher, Morgan Stanley's finance chief, said yesterday after the New York-based company reported better-than-estimated earnings for the third quarter.