The CFO said those efforts paid off in September 2011, as concerns mounted that the European sovereign-debt crisis was spreading and that Morgan Stanley was overexposed. The price of swaps protecting against the bank’s default tripled, surpassing those of Italian lenders, and its shares fell almost 50 percent.
Even so, Morgan Stanley’s internal risk updates showed its liquidity barely budged, Porat said. The bank wasn’t forced to sell assets, and clients pulled out less than 10 percent of what the firm had prepared for in the first month of a crisis.
It wasn’t a true test of Morgan Stanley’s ability to survive a meltdown. The scare was defused in December 2011, when the European Central Bank said it would pump as much liquidity as needed into the region’s lenders.
Zero Chance
The steps banks have taken make another crisis on the scale of 2008 almost impossible, according to Morgan Stanley’s CEO.
“The probability of it happening again in our lifetime is as close to zero as I could imagine,” Gorman said in an interview last week on PBS’s “Charlie Rose” show. “The way these firms are managed, the amount of capital that they have, the amount of liquidity that they have, the changes in their business mix -- it’s dramatic.”
Morgan Stanley still has the highest leverage of any of its peers under a proposed Fed rule that would require banks to have at least $5 of equity for every $100 of assets. The firm now has $4.20 according to that measure, which calculates leverage differently than the banks. That means a 4.2 percent net drop in asset values could wipe it out. Porat said the company will reach the proposed minimum within two years.
Morgan Stanley also increased its derivatives holdings in the past four years. The notional value of those deals, most of which aren’t recorded on its balance sheet because they’re netted out under accounting rules, surged 20 percent to $46.9 trillion as of the end of March, according to the Office of the Comptroller of the Currency.
Hiding Risk
Those transactions, along with repurchase agreements that also supposedly offset one another, are part of a shadow-banking system that has more than doubled since 2002, according to the Financial Stability Board. While notional values exaggerate the extent of the risk, netting underestimates it and provides hidden leverage to banks, said Gary Gorton, a finance professor at Yale University.