Morgan Stanley: Back from the brink

First of all MS didn’t become a bank until August of ‘08, and only to qualify for bailout money. Do yourselves a favor and google “morgan stanley advise” and “morgan stanley buys” then do a little research.

Back to the original question, I still believe that ‘banks like Morgan Stanley’ still have a lot of pain ahead of them. Any bank like them that has large positions in mortgages written since 1998 will have some problems. Here’s why:

I had thought that the housing bubble began in 2002 and lasted until 2006: 5 calendar years. But, the Case Shiller chart indicates that it actually began in 1998 and lasted until 2006. The vast majority of mortgage defaults occur in the first 5 years. If you count back 5 years from today, the problems that we see are mainly from mortgages written prior to 2004. The reason officials are running for cover is that the mortgages written from 2004 through 2007, which included a LOT of HARMs (hybrid adjustable rate mortgages) are getting ready to start resetting to much higher interest rates and much higher default rates as the borrowers just walk away. Many of these mortgages were also issued against very inflated appraisals, often for twice what the properties are really worth. No American I know wants to pay 2x what something is really worth. They won’t be foreclosures; they’ll be voluntary OREOs (‘other real estate owned’ by banks), kind of like returning unwanted merchandise to a store. The banks hold the titles until the mortgages are paid off.

I wish that all states had such good bankers as KS (maybe that’s why Dorothy was trying so hard to get back there from Oz), but they don’t.

All we can do is watch the fireworks and try to not get burned. The good news is that there should be some sweet deals over the next few years, if you’ll be in the market for a new home in which to live.

Mid Westerner has it totally correct in that there are still good solid banks out there. I have (quite a while ago, actually) figured out which LOCAL banks here were it, and put my money there.

This would be good practice for all because the banking industry, as a whole, has a lot of pain left. Many (most) of them have business models that depend on continued borrowing. Borrowing not just at the completely unsustainable levels that we were indulging in up until last summer, but at a continuing-ly growing pace.

In case anyone missed it, that isn’t going to happen. Over-leveraged average people are figuring out they simply can not carry the debt they have, much less more. Without a continuing, and accelerating, influx of money, the over leveraged banks (most of them) will go down the tubes just like, and for the same reason as, Bernie Madoff.

And, because 70% of our total economic activity was consumer spending, and since that support of 6x(!!!) the retail space of the next closest nation was fueled with that now unsustainable borrowing, a lot of those imprudent loans are going bad. Sub-prime mortgages, we know. Prime mortgages, we are learning are going too. Car loans? look out below. Credit card debt? how about “Oh my God”.

Some banks will survive. Maybe even some publicly traded ones.

Good luck picking them.

Mike in Redwood City:
There already are ‘good banks’ in most, if not all, states. Do your research and you’ll find them. They never participated in sub-prime mortgages, nor did they purchase junk bonds supported by those mortgages. I have to laugh everytime I hear that “banks” are to blame for much of the mess. Most true banks never touched the junk that caused these problems. These more conservative banks aren’t failing though they are being challenged by the decline in interest rates on the loans they’ve made and continue to make.

The worst is over for some banks, maybe including Morgan Stanley, but the banks with big exposure to junk mortgage bonds still have a lot of pain in their futures. They need to stop groveling for government handouts, sit down with the borrowers, and restructure those loans so that the customers won’t just walk.

I saw a Case Shiller chart over the weekend. The housing bubble really started in 1998, so house prices will probably fall back there and then stabilize. This represents about an additional 40% fall from current levels. This process could take until 2014, or it could happen quickly. Either way, any mortgage written since 1998 is suspect until proven otherwise.

The banks have been hiding their exposure to junk mortgage bonds; everyone seems to have figured out that Citi has tons of them, and ML already sold theirs to TPG at 22c on the dollar (probably about fair value), but someone holds the rest.

We really need Obama to use the $350 billion of TARP II to set up some ‘good banks’ (maybe one in each state) with fresh capital and no mortgage exposure to lend to consumers and businesses, but not do any mortgages. In addition, the credit unions seem really solid, but they’re not-for-profits, so there’s no stocks to trade.

Morgan Stanley was never nearly as highly leveraged as the market feared it might have been, and it had very little exposure to subprime. It was able to obtain a much needed capital infusion, and now is deploying that capital to improve the value of the company – very well done in a difficult time.