Morgan Stanley, Goldman Change Lending Systems

(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 themarket’s view of their own creditworthiness as a basis for lendingdecisions, the Financial Times reported.

Wall Street’s second-largest investment bank Morgan Stanley isessentially tying its promise to provide financing to hedge fundclients to the price of credit insurance on its own debt, it said.

If the cost of the protection rises to a certain level, that wouldtrigger a reduction in Morgan Stanley’s commitments to hedge funds, thequoted people familiar with the situation as saying.

The message is that "if our firm is in trouble, we would rather fundourselves than fund you (hedge funds)," the paper quoted a brokerageexecutive with knowledge of the arrangements as saying.

Goldman Sachs, which has largely avoided the credit losses hobblingits rivals, is understood to have a similar arrangement that uses itsbond prices as a reference point for credit commitments to hedge fundclients, 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-ratesecurities and pay fines to settle charges that they misled investorsabout 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 weaktrading, investment losses and a slowdown in investment banking, evenafter it realized $1.43 billion in one-time gains.

JPMorgan said last week that it had racked up $1.5 billion of lossesso far in the third quarter mortgage-linked assets, reflectingdeepening turmoil in credit markets.

(Reporting by Saumyadeb Chakrabarty in Bangalore; Editing by Paul Bolding)