Morgan Stanley, as reported by The Financial Times, is tying its promise to provide financing to hedge fund clients to the price of credit insurance on its own debt, it said. If the cost of the protection rises to a certain level, that would trigger a reduction in Morgan Stanley's commitments to hedge funds.(Reuters) - Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz)
are responding to the credit crisis with a system that uses the
market's view of their own creditworthiness as a basis for lending
decisions, the Financial Times reported.
Wall Street's second-largest investment bank Morgan Stanley is
essentially tying its promise to provide financing to hedge fund
clients to the price of credit insurance on its own debt, it said.
If the cost of the protection rises to a certain level, that would
trigger a reduction in Morgan Stanley's commitments to hedge funds, the
quoted people familiar with the situation as saying.
The message is that "if our firm is in trouble, we would rather fund
ourselves than fund you (hedge funds)," the paper quoted a brokerage
executive with knowledge of the arrangements as saying.
Goldman Sachs, which has largely avoided the credit losses hobbling
its rivals, is understood to have a similar arrangement that uses its
bond prices as a reference point for credit commitments to hedge fund
clients, the paper said.
Morgan Stanley and Goldman Sachs did not immediately return calls seeking comment.
Last week, Morgan Stanley and JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz)
agreed to buy back billions of dollars of illiquid auction-rate
securities and pay fines to settle charges that they misled investors
about the debt's risk.
Morgan Stanley had agreed to buy back $4.5 billion of debt and pay a $35 million fine to settle the charges.
In June, it reported a 57 percent drop in quarterly earnings on weak
trading, investment losses and a slowdown in investment banking, even
after it realized $1.43 billion in one-time gains.
JPMorgan said last week that it had racked up $1.5 billion of losses
so far in the third quarter mortgage-linked assets, reflecting
deepening turmoil in credit markets.
(Reporting by Saumyadeb Chakrabarty in Bangalore; Editing by Paul Bolding)
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