To The Fed And Congress: You Must Stop This NOW


What are you looking at?  Trading activity in Morgan Stanley front month options.

Those $5 PUTs, in particular, are only valuable if the firm goes bankrupt in the next three weeks.

This can only happen if Morgan has been lying about its exposure to European debt and its balance sheet.  This is a true or false question: Either they have been, or they are not.

The government must step in right now and ascertain which is the case.  If they’re bankrupt, then they need to be declared bankrupt today and every executive in the firm must be arrested and indicted.

If they’re not then the firm must be forced to prove it, along with all the other banks.

This gamesmanship is exactly how Bear Stearns and Lehman went down.  It is starting again, and the market does not believe that these firms have any money.  Morgan Stanley is trading at 0.45 times book – that is, one half of the claimed book value.

That’s ridiculous.  Either the company is in fact worthless or the attacks on their stock and credit are bogus.

The market is going to force another credit lockup if the lying — perceived or real — does not stop.

The market is down sharply again this morning — in Europe and here — because the market believes bank balance sheets are all lies.  Now we have speculators who are willing to turn that belief into a vise-like squeeze on the firm’s stock price, which ultimately bleeds through to liquidity and credit.

I don’t know if they’re right or wrong.  What I do know is that permitting this sort of lying among “systemically-important institutions” is unacceptable and it must end or we will have another credit lockup.  Permitting this to go on instead of seizing and resolving these institutions in 2007 is why the credit dislocation in 2008 happened.

The time remaining to stop this outcome from becoming manifest in an environment where we have few if any policy tools to address it is quickly running out.

Discussion (registration required to post)