Shorts face big Mack attack- Sep. 17, 2008

The Morgan Stanley chief goes on the offensive after a solid earnings report fails to halt the stock’s collapse.

FORTUNE (New York) — For Morgan Stanley and Goldman Sachs, the two remaining standalone investment banks, the world has become an ugly place.

So ugly, in fact, that Morgan Stanley CEO John Mack sent out a firmwide note Wednesday afternoon blaming nefarious forces for the beating his company took in the stock and credit markets today. Morgan shares plunged to a 52-week low in heavy volume, in spite of a solid third-quarter earnings performance.

“After the strong earnings and $179 billion in liquidity we announced yesterday — which virtually every equity analyst highlighted in their notes this morning — there is no rational basis for the movements in our stock or credit default spreads,” Mack wrote.

He continued: “What’s happening out there? It’s very clear to me — we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down.”

It’s really unfortunate that there is so much irrationality in the market, and for the life of me, I can’t figure out what the short-sellers are attempting to do. Oh sure, I know they’re trying to make money, and in the short-term, they are doing just that.

But if they keep forcing companies into bankruptcy or hasty mergers, and forcing the Fed and the Treasury to inject more cash into the system, something is going to break and break big. And then we’re all going to be fucked.

I work for Morgan Stanley, and I’m low enough on the totem pole that I really don’t know what’s going on at the top … but everything I’ve seen is telling me that Morgan Stanley has been doing it right.

We’ve got Financial Advisors who are panicking and moving all of their clients cash out of our SIPC/CAPCO-insured money market funds and into our Bank Deposit Program (an FDIC insured bank account), where the cash may actually have LESS protection than if it were left in the money market fund … all because one money market fund, in an isolated incident, broke the buck because of an obscenely high exposure to Lehman Brothers.

Hey, brokers! Man up and THINK before you freak out over things that don’t affect us. You’re not helping the situation at Morgan Stanley if you start panicking your clients. Your job is to calm them down, and think about what’s best for them in the long-run.

Keep this in mind (from the same article):

[T]he shellacking Morgan Stanley is suffering does appear overdone.

The firm has exposure to problematic mortgage-backed securities, but it also has institutional and private wealth businesses that are resilient income generators.

It did indeed take billions of write-downs, but it was never the player in toxic collateralized debt-obligations that Merrill and Citi were. Nor did it use its balance sheet to hold over $100 billion in sub-prime mortgages like UBS (UBS).

In other words, Morgan appears to have been significantly less stupid with its finances than most of its peers.

So why are you acting as though we’re on the verge of collapse? I can see we’re strong, why can’t you? Oh … yes … because you are salesmen, and panicked clients make lots of trading decisions, which pump up your commission revenue.

Is it worth it, if you kill the company in the process? Do you really think that you’ll be better off if Morgan Stanley is forced into a hasty merger with another company like Wachovia? Because even a strong company can be killed if they just keep getting hit irrationally from all sides. Do you really want Goldman Sachs, over whom Morgan Stanley actually performed better, to be the sole survivor in the independent investment bank sector?

Think. Calm down. Relax. Calm your clients. And make WISE decisions for the long-term.

Goldman tried to recruit me a couple of months ago. I turned them down flat. Morgan Stanley is my company, and it’s where I plan to stay.