If you are looking for an explanation as to why Morgan Stanley and Goldman Sachs' stocks were getting pummeled the last few days despite their relatively decent earnings results, this is it. Although the SEC and some pension fund managers believe this is an attack on the US financial system by opportunistic hedge funds, I believe it is investors reacting to the potentially catastrophic consequences of a complete seizure in the money markets that is bigger than the Fed's capability to resolve. Morgan and Goldman rely on the money markets for financing, which are still digesting the consequences of the rash of bailouts, takeovers, and bankruptcies. Two money market funds just reported that they broke the buck due to investments in Lehman commercial paper. How willing will money market funds be to invest in any more broker dealer investments?
Calculated Risk highlights a quote from Morgan CEO John Mack in a NY Times article that is terrifying. According to two people briefed on talks between John Mack and Citi CEO Vikram Pandit, Mr. Mack said "We need a merger partner or we're not going to make it." It has been confirmed in the mainstream press that Mr. Mack is seeking a buyer for Morgan Stanley, however, that quote has a sense of urgency that is very unsettling. If Morgan strikes a deal, can Goldman survive as an independent dealer or will it too be forced to find a partner? I honestly don't know, and I suspect that the market's trajectory will continue downward until these issues are resolved.
Update: The Fed increased the amount of dollars that Central Banks around the world can offer from $67 billion to $247 billion. Let's hope it is enough.
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