Sometimes, even good bets can go bad.
Before the market for subprime mortgages cracked in February, some smart Wall Street players, including securities firm Morgan Stanley, were correctly betting it would go south.
Morgan Stanley executives had just gained a window into that market from the acquisition in December of a subprime-mortgage company. And a bearish bet helped Morgan Stanley report a 70% jump in profit to a record $2.67 billion in its first quarter ended in February.
Fast forward eight months. Even though the market for subprime mortgages -- which are loans extended to the riskiest borrowers -- continues to deteriorate, the same bearish bet has now cost the firm $3.7 billion, or $2.5 billion after tax, wiping out most of any profits Morgan Stanley might have made for the fourth quarter that ends later this month.
What went wrong? It turns out Morgan Stanley's hit has a lot in common with a much larger write-down of $7.9 billion incurred by rival Merrill Lynch & Co. Both firms wound up with huge positions of super-senior segments of collateralized debt obligations, or CDOs, which are securities backed by pools of mortgages and other assets.
The firms held the super-senior CDOs -- considered relatively safe investments -- for different reasons. Merrill's total CDO inventory of $32.1 billion June 29 was a byproduct of its league-leading franchise underwriting CDOs. Morgan Stanley's $13 billion at the start of this year helped hedge and finance its bearish subprime bet, company officials said.
But one common element, Wall Street analysts and Morgan Stanley officials said, was the CDOs paid a higher interest rate than the firms' cost of financing. That generated seductive profits for both firms until the bottom fell out in October after more modest declines in August and September.
In some respects, the way Morgan Stanley's subprime bet went awry is similar to how some quantitative-hedge-fund bets soured over the summer. The hedge funds expected low-quality stocks to perform worse than 'value' stocks in a downturn, but instead it was the higher-quality shares that got hit.
On a conference call with analysts late Wednesday afternoon, Morgan Stanley's chief financial officer, Colm Kelleher, said the firm's proprietary traders began making the bearish bet against the subprime market in December, the very month that Morgan Stanley acquired subprime lender Saxon Capital Inc. for $706 million.
Both the acquisition and the trading strategy were in line with Morgan Stanley Chief Executive John Mack's stated determination in the fall of 2005 to take more risk with the firm's capital, a goal that echoed that of former Merrill Lynch CEO Stan O'Neal, who left his position last month following his firm's losses.
Armed with Saxon, Morgan Stanley quickly climbed to the No. 1 ranking in subprime-mortgage-securities underwriting this year, according to Inside Mortgage Finance, a trade publication in Bethesda, Md. That is up from No. 5 in 2005 and No. 3 in 2006. Merrill, which also acquired a subprime-mortgage company, rose to No. 2 this year from No. 4 in 2006 and No. 7 in 2005.
The subprime-mortgage-underwriting drive left Morgan Stanley with $2.9 billion in subprime loans and $4 billion in subprime-mortgage securities on its books as of August. But that position was hedged by an offsetting bearish subprime bet totaling $6.6 billion.
A Morgan Stanley official said the bearish subprime wager wasn't begun in December to hedge the subprime underwriting of Saxon. But he said it might have been constructed partly from Saxon-generated assets. And he said it might have been informed by market data that Morgan Stanley was getting from Saxon's activities.
The bearish subprime bet, which took the form of derivatives called swaps, required Morgan Stanley to pay interest on those contracts, the same official said. To offset the bearish subprime bet and help generate interest income to pay the cost of the swaps, he said, the firm amassed the CDO position that produced most of the losses announced Tuesday.
The biggest piece of the $3.7 billion in pretax paper losses, the firm's data indicated, came from a write-down of the CDO position from $11.4 billion Aug. 28 to $8.3 billion Oct. 31 -- a difference of $3.1 billion. Such securities fell as much as 4.4% in August and 4.5% in September but tumbled as much as 27% in October.
On the call with analysts, Mr. Kelleher said the mortgage-related bets 'did not come out of our client-facing activities' such as underwriting.
Instead, he said, 'we began with a short position in the subprime-asset class, which went right through to the first quarter.' But as the downturn spread to the senior CDO holdings that were meant to hedge the subprime bet, the firm's exposure changed 'from short to flat to long,' Mr. Kelleher said.
'You go short, expecting a certain predefined range of losses,' Mr. Kelleher said. He added, 'That range of losses was burnt through by the excessive market action. And then you ended up effectively going long.'
Through the first nine months of the fiscal year through August, Goldman Sachs Group Inc. analyst William Tanona noted that the bearish subprime bet actually earned Morgan Stanley a profit of $1 billion. But the firm's disclosure of the paper losses and the position sizes prompted two ratings firms to issue negative outlooks for the company's credit.
Moody's Investors Service said the news 'raises questions regarding the effectiveness of Morgan Stanley's trading risk management.' Merrill analyst Guy Moszkowski said the trade was 'too big.' Morgan Stanley ousted a team of CDO traders a few weeks ago.
Randall Smith
的时候，猜对了开头并不意味着也能猜对结局。
早在2月份次级抵押贷款市场出状况之前，就有一些明智的华尔街玩家正确地预见到该领域危机将至。摩根士丹利就是这些有先见之明的公司之一。
该公司高管之所以有这等洞察力还得益于去年12月它收购次级抵押贷款公司Saxon Capital Inc.的交易。摩根士丹利采取的作空策略令它在截至2月份的第一财政季度中利润达到了创纪录的26.7亿美元，增幅达70%。
八个月的时间转瞬即逝。虽然当前次级抵押贷款市场的滑坡还未见底，但同样的作空策略却已经给摩根士丹利带来了税前37亿美元（税后合25亿美元）的损失。该公司第四财季即将于本月结束，估计最后它的盈利情况将受到上述冲销的严重拖累。
哪里出了问题呢？现在摩根士丹利和美林公司(Merrill Lynch & Co.)可谓殊途同归，只不过后者的冲减额更高一些，达到了79亿美元。这两家投行之所以进行资产冲减都是因为它们持有的所谓超优先债权抵押证券(CDO)价值出现了严重缩水，后者是一种由若干抵押贷款和其他资产支持的证券。
摩根士丹利和美林是出于不同原因而持有超优先CDO这种相对安全的资产的。截至6月29日，美林共计持有价值321亿美元的CDO，这是这家CDO承销大户开展业务的副产品。而公司管理人士称，摩根士丹利年初时价值130亿美元的超优先CDO是为了帮助其次级抵押贷款的作空头寸进行对冲及融资的。
不过在华尔街分析师和摩根士丹利的管理人士看来，它们之间确有一个相同之处，那就是这些CDO所带来的利息收入要高于公司的融资成本。此类业务一直都在产生诱人的利润，直到这两家投行的盈利状况在10月份时急转直下，而8月和9月它们利润的滑坡还要温和的多。
从某些方面衡量，摩根士丹利作空策略的溃败与定量对冲基金在今夏遇到的困境颇有相似之处。这类对冲基金预计在市况不佳时，低质股票的表现会不及那些优质股票，但实际上表现糟糕的恰恰是后者。
摩根士丹利首席财务长科尔姆•凯勒尔(Colm Kelleher)在周三下午与分析师召开的电话会议上表示，公司的自营业务交易员在去年12月时开始对次级抵押贷款资产进行作空。该公司正是于那时斥资7.06亿美元收购了次级抵押贷款发放机构Saxon Capital Inc.。
不论是收购交易还是作空策略都符合摩根士丹利首席执行长麦晋桁(John Mack)在2005年秋天时做出的表示。他当时谈到要利用公司的资产进行一些高风险高回报的投资，这与美林前首席执行长斯坦•奥尼尔(Stan O'Neal)倒是“英雄所见略同”，不过后者已于上月因公司蒙受的巨额损失而黯然离职了。
业内出版物《Inside Mortgage Finance》提供的数据显示，在将Saxon纳入囊中后，摩根士丹利今年迅速登上了次级抵押证券承销业务的头把交椅，该行2005年和2006年此类业务的排名分别为第五和第三。而美林也在收购了一家次级抵押贷款公司后，排名由2005年的第七和2006年的第四跃居第二。
截至8月份，相关承销业务给摩根士丹利帐面上留下了价值29亿美元的次级抵押贷款以及40亿美元的次级抵押证券。不过这些头寸因为该行进行了价值66亿美元的对冲而得以抵消。
摩根士丹利的一位管理人士表示，该行作空次级抵押业务并不是从去年12月份开始、专门用来对冲Saxon承销的次级抵押贷款的。但他表示这当中可能确有一部分构筑于Saxon的资产。他指出，市场数据或许可以表明是Saxon的经营给摩根士丹利带来了影响。
上述管理人员表示，这种作空策略（以掉期形式展开）要求摩根士丹利为这些合约支付利息。为对冲这一作空交易，并产生利息收入来支付掉期利率，摩根士丹利屯积了一些CDO资产，而正是它们要为周二宣布的冲减负上主要责任。
摩根士丹利公布的数据显示，在37亿美元的税前损失中，最大一部分来自于CDO资产的冲减，它们的价值从8月28日的114亿美元锐减至10月31日的83亿美元，中间的差值达到了31亿美元。此类资产在8月份和9月份时价值分别下滑了4.4%和4.5%，到了10月份则一下缩水27%。
凯勒尔向分析师表示，与抵押贷款有关的交易与该公司面向客户的业务（如承销）无关。
他指出，该行对次级抵押资产进行了作空，这在第一财季看来是正确之选。但随着次债危机蔓延到原做对冲之用的优先级CDO领域，公司手中的风险头寸就经历了从空头、到持平、再到多头的转变了。
凯勒尔还谈到，当人们作空时是预计资产将出现一定的亏损，但过度的市场活动导致亏损超出原先的设想范围，手中资产实际上就变成作多了。
高盛(Goldman Sachs)分析师威廉•塔诺纳(William Tanona)预计在本财政年度（截至8月份）的前九个月中，对次级抵押贷款资产的作空策略为摩根士丹利赚得利润10亿美元。但该行的帐面损失及手中头寸的规模令两家评级公司对摩根士丹利的信贷评级前景给出了负面评级。
穆迪投资者服务公司(Moody's Investors Service Inc.)表示，有关摩根士丹利冲减资产的消息令人怀疑该行能否有效地管理交易风险。美林分析师盖伊•莫斯考斯基(Guy Moszkowski)则认为该行的交易规模过大。几周前，摩根士丹利已经遣散了一支CDO交易团队。
Randall Smith
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