Commentary: Morgan Stanley's fine print suggests deeper woes
Imagine a Morgan Stanley broker telling his or her client about some assets that are nearly worthless because they can't be sold. Would that customer feel any better that the brokerage was simply "reclassifying" that investor's losses?
That seems to be the question facing investors in Morgan Stanley today after the brokerage and investment bank said it reclassified $7 billion of funded assets and $279 million in unfunded assets from Level 2 to Level 3.
The levels are a new kind of accounting parlance Wall Street instituted last year. The bigger the number, the harder it is to sell or value the securities in question. In other words, Morgan Stanley no longer knows how much these assets are worth because no one is buying.
Morgan Stanley says the "reclassification" affects commercial whole loans, residuals from residential securitizations, interest-only commercial mortgage and agency bonds as well as commercial and residential credit default swaps. These are the kinds of subprime derivatives that some firms have written off.
Just as troubling for investors is how Morgan Stanley announced the move: It was buried on page 64 of its 191-page quarterly report. It's been a long three months since the firm won kudos for taking an aggressive $3.7 billion write-down that many thought would represent the worst for the firm.
A few weeks later, that loss had grown to more than $9 billion. Now, it appears those losses are going to be reclassified higher, and to top it off, the brokerage is being investigated by regulators over its role in the subprime crisis.
No broker who wanted to earn his client's trust would try to hide a loss behind slick words. What does Morgan Stanley think of its investors?
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