I’m here to dissect the balance sheet of Morgan Stanley and demonstrate the solutions that I’ve invented to proof against what I see is an upcoming, nigh guaranteed collapse. Before we get to that, we need to come to terms with counterparty risk and exactly what it entails. Also realize that Morgan Stanley is not unique in any way, balance sheet wise. What goes for MS can go for any money center bank on the street.
Now… Counterparty risk, more commonly known as a default risk in some circles, is a risk that a counterparty will not pay as obligated on a financial contract – including bonds, derivatives, insurance policies, repurchase agreements, etc. Parties to a transaction may attempt to hedge this risk via offsetting trades or credit insurance, but a true offset or perfect hedge is rarely possible and is usually (in reality) non-existent. In addition, hedges are usually the most useless when they’re most needed due to issuess of liquidity, correlation, cross colateralization, rehypothecation, and macro/systemic disconnects.
Starting in 2007, I waived the counterparty risk flag for several financial institutions, nearly all of which collapsed within 3-6 months of my warnings – all having investment grade ratings and buy recommendations at the time of my warnings, by the way. Reference a sample of such warnings and the anecdotal notes that I pasted on about each:
The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? Notice the similarities between Bear Stearns in 2007 and Morgan Stanley today… Bear Stearns is below: