Morgan Stanley is aggressively dressing itself up to exit TARP. The firm raised $8 billion in new capital on Friday through the sale of debt and equity, over 50 percent more than it announced on Thursday. The funds will cover an $1.8 billion shortfall in capital the Treasury identified in its stress test of the bank, the results of which were released Thursday. Morgan received $10 billion in TARP money in October of last year.
“They’re trying to get out of TARP, so they’re trying to be just as good as they can,” says Bernstein Research analyst Brad Hintz about the company’s change of heart. “To steal a phrase from Jamie Dimon, Morgan Stanley is trying to give itself a fortress balance sheet. All of these guys are trying to position themselves as the first bank out.”
The firm revised the amount of capital it would raise twice on Friday, first kicking it up to $7.5 billion from $5 billion , and then pushing it to $8 billion by mid-morning, when it announced plans to include the exercise of an “over-allotment” option. The company sold 146 million shares at $24 per share, as well as $4 billion in non-FIDC-backed debt. (Banks who want to pay back money received from TARP are required to issue debt without government guarantees.) Through the over-allotment option, the firm purchased an additional 21.9 million shares of its common stock at $24.00 per share.
Morgan Stanley has been working hard in recent months to clean up its balance sheet and rein in leverage. At the end of the first quarter, the firm had a leverage ratio of 11 to 1 compared with 32 to 1 just a year ago, according to Hintz’s data. “That is astoundingly low,” he says.
The treasury and the banks now have to battle it out about whether some banks will be allowed to pay back their TARP money or not, and if so, when. The Treasury has said publicly that it won’t allow any of the big banks to fail, so it’s on the hook whether they have TARP money or not. “Conservative treasury officials are saying, ‘I’m not sure I want them totally out of TARP,’” says Hintz. “On the other hand, [the Treasury] is running out of TARP money, so maybe it would be nice to have a war chest in case something unforeseen happens. The Treasury probably won’t get any more money from Congress.”
Overall, the results of the stress tests were better than expected, giving a boost to bank stocks in trading Thursday and Friday.