大象传媒

Lucky Morgan Stanley

• Robert Peston
• 22 Jul 08, 01:43 PM

Morgan Stanley looks to be a very lucky bank indeed.

On Friday, after the 11am close of the HBOS rights issue, it received orders in colossal size from hedge funds which were covering their respective short positions in the stock of the mortgage bank.

Morgan Stanley sold HBOS stock to these hedge funds, by creating short positions for its own book.

In this way, it went short to the tune of 2.3 to 2.4% of HBOS's equity.

And because HBOS's share price enjoyed a strong surge on Friday, Morgan Stanley took out this short at a very attractive average price.

Which is why, as I pointed out yesterday, it may well end up in profit on this massive flop of a rights issue, even though it is sitting on something approaching 拢750m of HBOS shares that HBOS's battered shareholders did not want to buy.

And the short is just big enough to reduce Morgan Stanley's net shareholding in the enlarged HBOS to a fraction below the 3% disclosable limit.

So the US investment looks very smart.

For Morgan Stanley, the fact that it was responding to orders from clients, rather than soliciting those orders, is terribly important.

It feels that it can't be accused of profiting at customers' expense from its privileged position as joint lead manager of HBOS's rights issue.

And for the avoidance of doubt, I have checked with the FSA - and the City watchdog has confirmed both that it was kept abreast of Morgan Stanley's dealings (and those of the other lead manager, Dresdner Kleinwort) and that it nodded an okay for these deals.

That said, Morgan Stanley was in possession of valuable price sensitive information, at the time that it went short of HBOS.

It knew - and the market didn't - how much of the underwriting for the 拢4bn rights issue had been placed with long-term investors likely to hold the HBOS shares that would be forced upon them, and how much of the underwriting remained on its own books.

It therefore had a strong sense of the potential size of the overhang of HBOS stock and how that would weigh on HBOS's share price.

Also, Morgan Stanley would have known that the rights issue had flopped (though at the relevant time it would not have known the precise number of HBOS investors who had spurned the share sale). But that debacle was blindingly obvious to all professional investors, so was probably less of an advantage.

To reiterate what I said yesterday, I am persuaded that neither Morgan Stanley nor Dresdner (which also shorted HBOS) broke the rules.

But if you or I had known what Morgan Stanley knew and had shorted HBOS on Friday, we would probably be prosecuted for alleged insider trading.

So the rules - and the City's custom and practice - that allowed Morgan Stanley to go short to the tune of something like 拢250m look archaic and in urgent need of reform (along with much of the rest of the apparatus and antiquated regulations surrounding how our companies raise equity capital).

UPDATE 16:22

Here are a couple of extra relevant details.

1) The traders at Morgan Stanley putting in place the short last Friday from 11am onwards were not given official information about the scale of the rights flop.

2) Senior management at Morgan Stanley did not learn the grim details of the flop - that as little as 8 per cent of the rights shares had been taken up by shareholders - until shortly after 4pm on Friday.

• Permalink
• Comments (0)