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.

FDIC Criticizes Fed Handling of Bear Stearns: Says Banks Need Expanded Supervision

We think they need ADULT supervision.

But why quibble when its obvious that the Fed can provide BILLIONS in free money to investment speculators at NO COST to the public! They keep what they win, and if they lose the Fed takes it at no cost to anyone.

Isn't this what they have claimed? Marvelous!

We hear Wall Street calls this 'special facility' The Magic Dragon.

Investment banks need expanded supervision: FDIC
Wednesday June 18, 12:53 pm ET

WASHINGTON (Reuters) - Any troubled U.S. investment bank headed toward bankruptcy should be subject to supervisory intervention just like commercial banks, the head of the Federal Deposit Insurance Corporation said on Wednesday.

Renewing her call to expand regulation of investment banks after the collapse of Bear Stearns, FDIC Chairman Sheila Bair said a receivership and resolution plan should be created to maintain order in the markets and minimize losses for all parties involved.

"The government cannot be put in the position of having to simply write a blank check when these institutions get into trouble," Bair said in prepared remarks to be delivered before a group of financial professionals. (No matter how you wish to spin it, this is what was done under the leadership of the Bernanke Fed, and it was probably the worst policy decision of his chairmanship thus far - Jesse)

Bair was referring to the move taken earlier this year by the U.S. Federal Reserve to provide discount window liquidity and a credit guarantee of $29 billion to Bear Stearns, which is being acquired by JPMorgan Chase (NYSE:JPM - News).

We're Not Near the Bottom in Financial Writedowns

Paulson & Co. Head Says Credit Writedowns May Hit $1.3 Trillion
By Poppy Trowbridge and Tom Cahill

June 18 (Bloomberg) -- John Paulson, founder of hedge fund Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate.

``We're only about a third of the way through the writedowns,'' Paulson said, speaking at a hedge fund conference in Monaco today. ``There are a lot of problems out there and it will continue to be felt through the year. We don't see any signs of stabilizing.''

Paulson, 52, whose company Paulson & Co. manages about $33 billion, returned 12 percent in his Advantage Plus Fund through May, according to investors. Last year, Paulson's Credit Opportunities Fund climbed almost sixfold. He has been betting on an increase in corporate defaults and a slowdown in the U.S. economy as home prices and consumer-spending to decline.

Royal Bank of Scotland Warns Its Customers of a Financial Markets Crash

The initial reaction we had was that RBS was doing some 'reverse jawboning' on Monsieur Trichet of the ECB with regard to interest rate increases. We don't follow Europe closely but we think increases by the US Federal Reserve are strong dollar fantasies for all the reasons which we've outlined in previous discussions.

Still, its rare to read such a specific prediction of a 300 point decline in the SP within three months from a 'name' banking institution which ought to be in a position to render an informed opinion.

But it does fit with our bias here to be prepared for the worst, and if it does not come, then so much the better for us all. Our outdoor activities have blossomed into a case of Lyme disease, so we'll be working lighter hours for at least the next month or so while time and the proper medicines do their work. Too bad such an effective remedy is not in the medical kit of Dr. Bernanke. Or is it?

RBS issues global stock and credit crash alert
By Ambrose Evans-Pritchard
11:44pm BST 17/06/2008
UK Telegraph

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names."

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.

US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.

Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates."

"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.