Morgan Stanley, Goldman Sachs and HBOS: Caught in the Mortgage Quagmire
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 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.
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.
Morgan Stanley shares closed down 10.8 percent at $28.70 on Tuesday, having fallen 46 percent so far this year.
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.