Commentary

Investment Banks Lose a Bundle

What exactly constitutes a staggering loss these days? Just today, Morgan Stanley announced that it lost $3.7 billion on subprime mortgage-linked securities in the past two months – whoops.

These are actually write-downs of existing investments, and the company mentioned that their exposure to these toxic turds has been cut to a mere $6 billion. This means that this figure represents the maximum amount of loss they could suffer if the entire portfolio of mortgages defaulted.

Compared to the other investment banks- Merrill Lynch wrote-down $7.9 billion and Citigroup $11 billion- Morgan Stanley’s blunder seems rather modest.

There is a slight difference between Morgan Stanley’s losses and those of Merrill Lynch and Citigroup. The latter two underwrote huge amounts of subprime mortgage securities- too much for a souring market to digest. As a result, they couldn’t peddle these worthless securities and had to bear the losses themselves. Morgan Stanley just engaged in enormous subprime trading bets that went bust.

It really doesn’t matter exactly how they lost such enormous amounts of other people’s money (all ousted executives receive kingly exit packages at the expense of shareholders). These firms are supposed to be run by responsible financial professionals. They are constantly telling us – through the countless millions spent on television, internet and print ads- that they know best, and that they will safeguard our financial futures. Honestly, I would feel better entrusting my portfolio to my houseplant.

© 2007 Splendid Marbles.