Morgan Stanley: For Whom The Bell Doesn't Toll

The Annoying Thing About Goldman Sachs
The Vampire Squid has, on multiple occasions, stood on the stand, under oath, and proclaimed that their net exposure to AIG was negligible at the time that the housing market collapsed, FNMA and FHLMC took enormous bailouts, and Bear Stearns&Lehman failed. That, of course, was wrong at best, and a lie at worst. Why? The very parties that Goldman bought hedges from would have, in no small part, defaulted at the very time that they tried to enforce these hedges. Let's say that Goldman Sachs bought a CDS from Bank X to protect itself from AIG. If AIG were allowed to fail, then Bank X would have most probably failed. Goldman, in that case, would not have a chance to monetize its hedge on AIG. So for Goldman to claim, under oath, that it was "hedged" in the AIG case is wrong, wrong, wrong.

Why Morgan Stanley Isn't Goldman Sachs
Despite the Goldman "complex," Morgan Stanley isn't really in the same position that Goldman Sachs was during the financial crisis. The big noise being made is that Morgan Stanley has a great deal of exposure to French banks, which, in turn, have a great deal of exposure to Greece. Morgan Stanley has, not very successfully, stated that its net exposure is small. In other words, Morgan Stanley has used the same logic that Goldman did years ago. The difference? French banks are, although very important, not as pervasive and unknown as the mortgage-backed securities markets. The leverage factor is known. Of course, it is more complicated than that. If Morgan Stanley's hedges are bought from other counterparties that also dependent upon the solvency of French banks, then the same fallacy of the Goldman Sachs' logic above would apply in this case. However, this is most likely not the case, and the "net exposure" logic holds up much better than it did years ago.

Conclusion
None of this means that Morgan Stanley couldn't trade lower. Of course, owners of $MS, including employees, know that MS stock has been an unmitigated disaster. It didn't participate in the liquidity-induced meltup of 2008-2011, and has taken the full downside of 2011. So it is difficult to unilaterally state that Morgan Stanley stock is "cheap." However, the logic of French bank exposure to be the dominant cause? Nah. It is merely the easiest whipping boy of the financial shorts.