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By Jeremy Glaser | 10-04-2011 04:12 PM

It's Not 2008 for Morgan Stanley

Despite swirling rumors, Morgan Stanley is in a much stronger position today than the firms that went under during the financial crisis.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Credit spreads on Morgan Stanley's debt have been blowing out recently. I'm here today with Jim Leonard, a securities analyst at Morningstar, to see what investors are concerned about and if people should actually be concerned.

Jim, thanks for joining me.

Jim Leonard: Thank you for having me.

Glaser: So, let's talk about Morgan Stanley debt right now. We're seeing the credit spreads compared with Treasuries just getting wider and wider and wider. Why are people concerned about the health of the bank?

Leonard: Well, a lot of what is going on with Morgan Stanley is sort of rumor-based, and this sort of fear that this is something people have seen before with Lehman and with Bear Stearns back in 2008.

We're talking about an investment bank that has potential funding problems, rumors of funding problems, but no one can specifically point to anything. Then also the bank has disclosed it had some exposure to French banks, which, as we know, as Europe starts to create a potential crisis, there's the belief that that could feed into a U.S. bank.

Glaser: You mentioned 2008. That seems to really be the key question. Is this the canary in the coal mine that we're about to hit another financial crisis?

Leonard: Well, we don't think we are just yet. When you look at when Bear Stearns and when Lehman went down, and you focus on the tangible common equity to tangible assets, which is a very good ratio for banks to look at, both of those banks were in like the 2.8% to 1.3% ratio. When you look at Morgan Stanley today, you're talking 5.7%.

So, in other words, for every asset the bank has, it has 5.7% of tangible real common equity underneath it. So, that makes Morgan Stanley anywhere to 3 to 4 times more capitalized than those other banks were. So, from that perspective, we should not see the same problems.

However, when you're dealing with banks, sometimes fear or the perception of fear or the perception of problems can start to feed on itself, and that's another concern that people are worried about that's out there in the market.

Glaser: So, when you see that fear, could it spread to some of the other big players, such as to the Goldman Sachs and Bank of Americas' of the world?

Leonard: Well, we're not seeing it, and for good reason. A lot of the other banks seem to have a better handle of their short-term funding. A lot of the other banks don't play in the international market or are not as much of derivatives dealers as Morgan Stanley is. But remember, a lot of banks, even BofA with all of its problems, have a lot more deposits underneath it. So, they have what we call sticky or core deposits that fund a large portion of the balance sheet where Morgan Stanley doesn't have that.

Glaser: So you mention that Morgan Stanley said that it has some exposure to French banks. Do you think other banks are going to come out and say they do have a lot of exposure to Europe or do you think that Europe will mostly be contained overseas?

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