“Whooops. I hadn’t expected that,” said members of a crack team of speculators at Morgan Stanley. It was one little error, one wrong bead on the abacus of corporate banking, and yet it cost the bank $7bn. As for the bottom line, the bank made a quarterly loss of $3.59 billion, the first loss in 72 years. Mind you, shareholders and cynical commentators should ponder on this. The bank’s boss, John Mack, has magnanimously agreed to forego his bonus this year. “Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I’ve told our compensation committee that I will not accept a bonus for 2007,” said Mr Mack. So, if you are one of those bitter envious types who don’t like to hear about massive pay settlements to the great men and women who run our banks, put that in your pipe and smoke it. Mr Mack will have to live off his salary now. Who knows? Maybe he will have to apply for a subprime loan.
It seems the problem was that this crack team of speculators were just too clever for their own good. With tremendous foresight they reckoned there were going to be major problems with subprime, so they went short, which is to say that they bet on future falls in the subprime market. A clever move, that, but with a sting in the tail. To protect themselves from the possibility of calling it wrong, they also took a long position on conventional supersafe prime mortgages. Big mistake.
Morgan Stanley’s total write-downs, that’s including those from the previous quarter, now tally $10.3 billion. That puts the bank into the unfortunate position of occupying third spot in the league of this year’s write-downs. UBS is in joint first spot, tying with Citibank, but then the US banking giant is yet to reveal its fourth-quarter write-downs.
Total write-downs from the banks this year now come in at $70 billion. That sounds awful, but remember the IMF predicted total losses of $300 billion; even then, they reckoned the global economy would expand by 4.8 per cent next year.
But actually, something else far more significant occurred at Morgan Stanley yesterday. The bank also revealed that China Investment Corp is set to throw in $5 billion, in return for around 10 per cent of the bank.
As we have said before, the world is changing. Instead of China and the oil-rich countries buying US and UK debt, they are increasingly looking to invest into the US and UK in exchange for equity. In the short-term, it means wealthy sovereign funds are plugging liquidity holes. In the longer term it means US and UK assets are being sold on the cheap, which will in turn mean more dividend payments flowing away. This will put further pressure on the dollar, and then on the pound, in the longer term.
More to the point, at a time when our populations are ageing, we should be buying foreign assets. Instead, we are looking for foreigners to bail us out.
In the longer term, smoke and mirrors don’t work. If we are spending and borrowing when we should be saving, then there is a price to pay. And no cavalry charge, whether it be one led by “Helicopter” Ben Bernanke, Mervyn King, “Airbus” Jean-Claude Trichet, or the People’s Republic of China, can do anything to solve that.
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