As Barry Ritholtz observed on the Big Picture blog,
Investors have decided they cannot take the risk of a holding an opaque, possibly under-capitalized probably over-leveraged financial firm blindly. They are telling the banks no thanks, we are not interested, we are going to be prudent and we have to assume the worst. Hence, for the second half of 2011, they have been selling off their holdings in these opaque, potentially insolvent too big to succeed entities.Regular readers know that the solution is to end opacity and for banks to disclose their current asset and liability-level data.
A global bank’s share price drops more than 10 per cent in a single day over concerns about its exposure to the eurozone’s spiralling sovereign debt crisis. Sounds familiar? ... However, when that bank is Morgan Stanley ... it raises broader questions about shareholders’ confidence in the fundamental integrity of some of the world’s largest financial institutions, and whether the worst of the bear market for banks is yet to come....
So it is somewhat surprising that French bank executives continue to insist that their priority is deleveraging, rather than recapitalisation. “In this kind of market, I wouldn’t even know how much capital I had to raise,” one top French banker said last week, while insisting that investors in the US, in particular, are peddling doomsday scenarios.
It is true that the hit from a Greek default, while painful, would be manageable. BNP, which holds the largest amount of Greek debt among French lenders, is expected to take an additional €1.7bn hit in its third-quarter accounts. The impact of a writedown of its Greek exposure would shave just 15 basis points off BNP’s core tier one capital ratio, the key measure of financial strength, according to the bank’s estimates.
Markets, however, are pricing in the impact not only of a Greek default, but of a substantial haircut on Italian and Spanish debt. Investors simply do not believe that French banks hold enough loss-absorbing capital to withstand contagion across Europe.To address the fact that investors do not believe they are adequately capitalized, French banks, led by BNP Paribas and Societe Generale have started down the path towards 'utter transparency' by providing more disclosure about their exposures to sovereign debt.
The sooner they actually offer 'utter transparency' in the form of current asset and liability-level data, the sooner they will be able to address investors' worst fears.
Which brings us back to Morgan Stanley, where its sharp sell-offs have been traced in part to a widely circulated report that claimed the bank held $39bn worth of exposure to France.
People familiar with the situation at Morgan Stanley say the figures reported were from the end of last year and were gross, rather than net, numbers. The bank’s net exposure to France, those people say, is actually near zero....
Turbulent markets and a drop-off in dealmaking in recent months are expected to take a heavy toll on Morgan Stanley’s earnings, but executives insist its fundamentals remain sound.Like the rest of the banks, Morgan Stanley has reached put up or shut up time. Either disclose your current asset and liability-level data to show that investors should not be worried or understand that the lack of disclosure is confirmation of the problem.
Like their European rivals, however, they may be shouting into the wind.Actually, investors who lack the ability to Trust, but Verify bank management's claims are acting prudently by reducing their exposure.