Deal or no deal, Morgan Stanley commodity trade shrinks

NEW YORK, Thu Jun 7, 2012 – The hard core of Morgan Stanley’s commodities trading empire, once the mightiest on Wall Street famed for its powerful union of paper and physical deals, is shrinking.

Even as the bank is reported to be considering selling a stake in its billion-dollar commodities unit, its physical trading activity in key U.S. markets is contracting in the face of abruptly changing market dynamics as well as diminishing risk appetite due to growing regulations and capital constraints.

In the power markets, it is trading only one-fifth as much electricity as five years ago. In oil, its imports to the United States fell last year to the lowest since 2004, while exports remain negligible. It barely makes the top 100 list of U.S. natural gas traders, with activity slipping from 2010.

Even the bank’s prized subsidiary TransMontaigne, a Denver-based refined petroleum products supply and distribution company it bought for $630 million six years ago, hasn’t helped it cash in on the boom in domestic U.S. crude oil trading this year. Its 2011 revenues were $152 million, up just 16 percent from 2007.

The data, based on government figures, port intelligence, securities filings and market sources, casts in sharp relief a trend that commodity traders say has been apparent for some time: Morgan Stanley is losing its edge in the opaque, over-the-counter cash commodity markets it once ruled.

Morgan Stanley to pay $5 million to settle CFTC case

WASHINGTON, Tue Jun 5, 2012 – Morgan Stanley agreed to pay $5 million to settle charges brought by the Commodity Futures Trading Commission that it executed unlawful noncompetitive trades, the agency said on Tuesday.

The bank executed, processed and reported off-exchange futures trades to the Chicago Mercantile Exchange and Chicago Board of Trade as exchanges for related positions over an 18-month period from 2008 to 2009, according to the CFTC.

The EFRPs constituted “fictitious sales” because the futures trades were executed noncompetitively and not in accordance with exchange rules, the CFTC said.

“The laws requiring that futures trades be executed on an exchange serve important price discovery and transparency principles,” said CFTC enforcement director David Meister.

“When a (broker) reports that it properly conducted an off-exchange futures trade as part of an EFRP, that report had better be accurate.”

A spokeswoman for Morgan Stanley said that bank was pleased to settle the charges.

“Morgan Stanley cooperated fully with exchange staff in the matter,” Mary Claire Delaney said in an email, noting that the order did not find any to customers.

She also said the settlement relates to trades initiated by a single former salesperson.

In the order, the CFTC said the bank “failed to supervise diligently its employees’ handling of the trades at issue.”

Morgan Stanley wants all of Citi Group venture-sources

NEW YORK, Fri Mar 23, 2012 – Morgan Stanley is interested in buying all of Citigroup Inc’s. stake in their wealth management joint venture this year in what could be a roughly $10 billion deal, said people familiar with Morgan Stanley management’s thinking.

Under the terms of the Morgan Stanley Smith Barney joint venture, Morgan Stanley will get an option starting May 31 to buy 14 percent more of the business from Citigroup, adding to the 51 percent stake it already has. It has options to buy the remaining portion in two more chunks through May 2014.

But both sides are beginning to suggest they would be interested in doing a deal for Citigroup’s entire 49 percent stake now instead of waiting for two more years, and have started behind-the-scenes posturing to negotiate.

Morgan Stanley and Citigroup spokespersons declined to comment on the potential for an accelerated deal.

Citigroup is carrying its stake in Morgan Stanley Smith Barney at a $21 billion valuation, while Morgan Stanley is carrying its stake at just shy of a $20 billion valuation. That means the 49 percent stake was worth $10.3 billion or $9.7 billion, respectively, as of Dec. 31.

While that might not be a large gap, investment bankers and analysts said Morgan Stanley is likely to come in with an initial lowball offer in the range of $15 billion, while Citigroup is likely to counter with a value of around $23 billion.

From Morgan Stanley’s point of view, Citigroup’s need to raise capital, as well as weak earnings and soft valuations for financial firms, should make it an eager seller.

The U.S. Federal Reserve this month denied Citigroup’s request to raise dividends after the bank failed its stress test. Citigroup is submitting a revised plan, which would either require a more modest dividend request or more capital. Selling its entire stake in Morgan Stanley Smith Barney would give it more flexibility to pay higher dividends.

Morgan Stanley directors win pay lawsuit dismissal

NEW YORK, Thu Mar 22, 2012 – Twelve outside directors of Morgan Stanley have won the dismissal of a shareholder lawsuit over their decisions on how to pay tens of thousands of workers.

The shareholders had accused the directors of corporate waste and breaching their duties with regard to their compensation decisions for 2006, 2007 and 2009.

But a New York State appeals court in Manhattan said the shareholders should have first demanded that the board make changes before suing.

The shareholders had contended that such a demand would be futile, but the court said they failed to show that enough of the board lacked independence. Thursday’s decision upheld a December 2010 lower court ruling.

Morgan Stanley details effect of possible downgrade

NEW YORK – Morgan Stanley said it will have to post another $6.52 billion in collateral to counterparties and clearinghouses if Moody’s follows through on a warning that it might cut the Wall Street bank’s long-term debt rating by up to three notches.

A one-notch downgrade by Moody’s would require $1.04 billion in additional collateral, and a two-notch downgrade would require $5.17 billion in additional collateral, Morgan Stanley said in its annual filing with the U.S. Securities and Exchange Commission on Monday.

Those figures are higher than the $1.69 billion and $5.15 billion Morgan Stanley said it would have to post in the event of a one-notch or two-notch downgrade in its annual filing a year ago. It did not provide an estimate for a three-notch downgrade at that time.

Morgan Stanley currently has a “split” rating among the primary ratings agencies. Moody’s rates its long-term debt at A2, one notch above S&P’s A- rating, but at the same level as Fitch’s A rating.

Moody’s warned Feb. 16 that it might downgrade Morgan Stanley by as much as three notches following a reassessment of large financial institutions.

Morgan Stanley also said it lost money in trading during 49 days last year, up from 38 days in 2010.

Despite more money-losing days, the Wall Street bank’s sales and trading revenue rose 25.7 percent last year to $12.9 billion, up from $10.3 billion in 2010. Morgan Stanley brought in more than $100 million in trading revenue in 26 days last year, up slightly from 25 days in 2010.

Morgan Stanley names 210 new managing directors

NEW YORK – Morgan Stanley announced the promotion of 210 employees to managing director on Tuesday, a smaller lot than the previous year as the Wall Street bank’s overall workforce shrank.

For 2010, Morgan Stanley promoted 232 employees to managing director, up from the 212 workers who received the title in 2009 and the 133 who were promoted in 2008.

Managing director is a coveted title at Wall Street banks that is bestowed on a relatively small pool of employees each year. The mantle comes with higher pay and more responsibility but in an uncertain work environment for bankers and traders – with thousands of job cuts across Wall Street – it also offers the newly promoted a modicum of job security.

In mid-December, Morgan Stanley announced plans to lay off 1,600 employees across its investment banking and trading operations, in addition to hundreds of job cuts that earlier took place at its wealth management division. On Dec. 31, Morgan Stanley had 642 fewer workers on its payroll than a year earlier.

Its chief rival, Goldman Sachs Group Inc, promoted 261 employees to managing director in November, a 19 percent drop from the previous year. Goldman cut 2,400 jobs in 2011.

Morgan Stanley to cut 1,600 jobs in first quarter

NEW YORK ― Morgan Stanley will cut 1,600 employees in the first quarter, the bank said on Thursday, as it trims costs in a difficult period for trading and banking revenue.

The job cuts will come across all staff levels and geographic areas, spokesman Mark Lake said, including investment banking, trading and back-office functions.

Morgan Stanley is one of the last big Wall Street banks to announce major job cuts as analysts have begun slashing fourth-quarter earnings estimates.

Other banks, including Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. have already outlined plans to cut thousands of jobs this year. Morgan Stanley had kept firings limited to several hundred underperforming financial advisers earlier in 2011, but is now extending the cuts to banking and trading.

The cuts represent less than 2 percent of Morgan Stanley’s workforce at Sept. 30 and come as the European debt crisis continues to add stress to the markets.Trading and dealmaking volumes have been hurt by volatile markets. At the same time, the value of securities banks hold for investments, clients or market-making purposes have declined, further hitting revenue and earnings.

Morgan Stanley is likely to report a loss in the fourth quarter, according to analyst reports this week, due to a special $1.2 billion charge the bank announced this week, related to a settlement with the bond insurer MBIA Inc.

Even excluding that charge, Morgan Stanley will earn just 15 cents per share for the fourth quarter, Atlantic Equities analyst Richard Staite predicted in a report on Thursday. That compares with 41 cents per share in the year-ago period.

Morgan Stanley settles with MBIA, sees $1.8 billion charge

NEW YORK ― Morgan Stanley and MBIA Inc. have agreed to a settlement that will remove some risky derivative contracts from the bank’s books and end lawsuits the two parties had filed against one another.

The deal, announced on Tuesday, will result in a $1.8 billion charge for Morgan Stanley in the fourth quarter. After a tax credit, the bank will lose $1.2 billion on the agreement.

The loss stems from declines in the value of mortgage-backed securities that Morgan Stanley owns. MBIA had been covering losses on the bonds because of credit-default swaps that Morgan Stanley purchased from the bond insurer.

Tuesday’s agreement will extinguish those derivative contracts, which have added to wild swings in Morgan Stanley’s quarterly earnings for the past five years.

It will also free up $5 billion worth of capital for Morgan Stanley and lift the bank’s Tier 1 common ratio by 75 basis points under new, tougher capital rules. Under existing rules, its Tier 1 common ratio will decline 30 basis points.

Morgan Stanley and MBIA also agreed to drop lawsuits against one another stemming from the CDS deals.

MBIA will drop a lawsuit over the quality of mortgage bonds underlying the contracts, Morgan Stanley said. The bank also agreed to withdraw from a lawsuit challenging a planned restructuring that will allow MBIA to write new business. MBIA is in similar litigation with several large banks.

The company will pay Morgan Stanley $1.1 billion to settle litigation, a source familiar with the matter told Reuters.

Shares of MBIA were up 7.7 percent at $12.28 in recent trading, while Morgan Stanley gained 4.6 percent to $16.09.

Morgan Stanley third quarter profit boosted by accounting gain

NEW YORK ― Morgan Stanley reported a third-quarter profit, reversing a year-earlier loss, helped by a large accounting gain that stemmed from declines in the value of its debt.

The second-largest U.S. investment bank earned $2.15 billion, or $1.15 per share, compared with a loss of 7 cents per share a year earlier. Revenue climbed 46 percent to $9.89 billion.

Excluding a gain of $3.4 billion from debt valuation adjustment, Morgan Stanley earned 2 cents per share. When a bank’s debt weakens relative to U.S. Treasuries, it can record an accounting gain because it could profit from buying back the debt.

Morgan Stanley shares were up 18 cents at $16.81 in premarket trading.

Revenue from its trading business more than doubled from a year earlier and climbed 24 percent from the second quarter. The sharp increases reflect the DVA gain.

Its wealth management group reported $3.26 billion in revenue, up 5 percent from a year ago but down from the second quarter.

Asset management revenue of $215 million fell 73 percent from the year-ago period and 67 percent from the second quarter due to losses on principal investments in its merchant banking and real estate investing business.

KKR & Co. hires Morgan Stanley strategist Henry McVey

NEW YORK ― Morgan Stanley strategist Henry McVey is joining private equity firm KKR & Co. LP as head of global macro and asset allocation, KKR said on Friday.

McVey worked at Morgan Stanley for more than a decade, interrupted by a brief stint as a portfolio manager at Fortress Investment Group LLC. He was head of global macro and asset allocation for Morgan Stanley Investment Management.

McVey, who will be based in New York, will help KKR build out its global macro and tactical asset allocation business, the company said. KKR has assets under management of about $61 billion.

Private equity firms have been expanding beyond their business model and in some cases are becoming large global asset managers with multiple products.

KKR rival Blackstone Group LP hired Wall Street strategist Byron Wien ― also a former Morgan Stanley strategist — in 2009 to provide economic direction and guidance.

Morgan Stanley said McVey would be succeeded by Cyril Moulle-Berteaux, who is returning to the bank to become head of the Global Asset Allocation team.

Moulle-Berteaux worked for Morgan Stanley’s investment management unit from 1995 to 2003 in various roles, including head of the Asset Allocation team, head of Asset Allocation Research and research analyst, it said.