Rogue Trader Strikes at Morgan Stanley UK Office

Morgan Stanley trading results marred by trader
Firm says credit positions mis-valued by roughly $120 mln; trader suspended
By Alistair Barr
MarketWatch
3:59 p.m. EDT June 18, 2008

SAN FRANCISCO (MarketWatch) -- Morgan Stanley said on Wednesday that fiscal second-quarter results were dented after a trader at the firm's London offices incorrectly valued positions by roughly $120 million.

When Morgan Stanley discovered the problem, the firm said it immediately suspended the trader and told U.K. regulators at the Financial Services Authority. It's now conducting a full internal review, the brokerage added in a statement emailed to MarketWatch.

A Morgan Stanley spokesman declined to comment further.

"We are very angry about it, but in this sort of environment of stressed markets, one would expect to see people try to behave improperly," Colm Kelleher, chief financial officer of Morgan Stanley, said during a conference call with analysts. "The issue is, do you have the controls to catch them? We believe we do."

The mis-valuation happened in Morgan Stanley's credit products unit, which includes trading of credit default swaps, credit derivative indexes and certain types of swaps.

Morgan Stanley's valuation snafu highlights again how the global credit crunch is testing the risk management of the largest brokerage firms and their ability to accurately value complex, sometimes illiquid exposures.

The credit products unit is part of the firm's fixed income sales and trading business. That business generated net revenue of $414 million in the second quarter, down 85% from a year earlier.

"We found this disclosure somewhat troubling, as it indicates that there have been some lapses in terms of valuing its trading book," David Hendler, an analyst at CreditSights, wrote in a note to clients on Wednesday. "Its ability to monitor its traders and marks is not as robust and timely as we would have hoped."

Other firms have experienced similar problems with traders incorrectly valuing positions this year.

Credit Suisse said in February that it overvalued asset-backed securities by at least $2.85 billion, leading the Swiss investment bank to suspend several traders. See full story.

In January, Societe General (FR:013080: news, chart, profile) , France's second-largest bank, stunned financial markets when it announced that rogue trader Jerome Kerviel cost it more than $7 billion. See full story.

Alistair Barr is a reporter for MarketWatch in San Francisco.