French bank fears rejected by Morgan Stanley


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Executives at at Morgan Stanley were last night cheering thesuccess of their efforts to restore confidence in the investment bank, after a bear raid on the company's share price and bond insurance that had threatened to spark anall-out panic.

Wild rumours about its exposure to French banks had threatened to make Morgan Stanley the first victim of transatlantic contagion from the eurozone debt crisis.

In the event, the cost of insuring the bank's debt fell yesterday and its shares solidified the dramatic rebound that began late on Tuesday, suggesting chief executive James Gorman and his lieutenants had scored an important victory in the confidence game.

Over the past week, discussion about Morgan Stanley's likelyexposure to the eurozone crisis looked like being overtaken by the bigger question of whether, as the smallest US investment bank, it might succumb to a run like the one that sank Bear Stearns three-and-a-half years ago in the early days of the 2008 panic. Traders pointed to unusually high levels of trading in Morgan Stanley credit default swaps, instruments that can be used as insurance against a debt default and are sometimes seen as a proxy for a company's creditworthiness, which were trading at prices not seen since 2008. The shares fell 15 per cent in two days. Analystsdebated the nature of the bank'sexposure to the French banking system, which totals almost $40bn.

But after a co-ordinated series of statements designed to allay any concerns, analysts queued up to dismiss any danger from the eurozone crisis. The French exposure includes collateralised loans and deposits which are not likely to be at risk even if a Greek sovereign default puts severe strain on many French banks, said Michael Wong, banks analyst at Morningstar, who calculated a worst-case scenario for Morgan Stanley at $800m of losses, less than 2 per cent of its capital cushion.

"People are worried about arepeat of the 2008 financial crisis for banks, but it is like comparing a house built in San Francisco before the 1906 earthquake and fire and a house built now with much better building materials," Mr Wong said. "All the US banks have significantly cleaned up their balance sheets."

Mr Gorman, in a widely-circulated memo to employees, said: " In fragile markets, where fear triumphs over common sense, these things are bound to happen. It is easy to try to respond to the rumour of the day, but that is not usually productive. Instead we should let balanced third parties do their own analysis and let the facts speak."

Mitsubishi UFJ, a Japanese bank which invested in Morgan Stanley during the 2008 panic, also reiterated its commitment to the investment bank.