Structured Investment Vehicle

Morgan Stanley Upped to Neutral

Earnings for the quarter came in substantially ahead of estimates, aided by strong investment banking performance. Adjusted earnings from continuing operations came in at 46 cents per share, up from the Zacks Consensus Estimate of 35 cents. This represents Morgan Stanley’s seventh consecutive quarter of income from continuing operation since the economic crisis.

Better-than-expected results were primarily aided by a strong investment banking performance. The increase in revenues from Global Wealth Management Group was also impressive.

The quarter also witnessed strong client franchise and improved performance in many of its businesses. However, reduced top line and higher non-interest expenses acted as headwinds.

Although investment banks are facing industry headwinds on the global front, Morgan Stanley enjoys a significant competitive leverage, given a relatively consistent growth momentum in its core Institutional Securities’ franchise.

Moreover, the company’s highly liquid balance sheet will provide flexibility to pursue growth initiatives. Also, since the past few quarters, Morgan Stanley has been taking initiatives to restructure its financials to mitigate balance sheet risk.

Despite the sluggish economic growth, Morgan Stanley posted decent results over the past few quarters aided by its systematic progress on rebuilding and refocusing. Though M&A and investment banking performances will take a while to deliver, stable credit spreads and strong trading activities are expected to be sufficient to sustain the current performance level.

Morgan Stanley’s initiatives to enhance liquidity will provide it flexibility to pursue growth plans. At the end of 2010, total liquidity was about $159 billion, up from $154 billion at the end of 2009 and $138 billion at the end of 2008. The conversion of MUFG preferred stock into the Morgan Stanley’s common stock will make it more flexible with respect to capital.

On the flip side, the implementation of Basel III is expected to restrict Morgan Stanley’s capital deployment. Moreover, following the Federal Reserve’s second round of stress tests in March, Morgan Stanley was not granted the green signal to raise dividend. We do not expect the company to be able to enhance shareholders’ value in the near to mid term.

Amar Bheenick: Bankers on the Beach

Host countries see such activities as a source of growth and a legitimate area for economic diversification. For critics, OFCs are a stark reflection of the severe problems—including tax evasion and money laundering—triggered by the lack of transparency and regulation that comes with unfettered globalization. For this reason, several international bodies, including the Foreign direct investment: OFCs play an important role in the internal organization of multinational firms. For instance, the financial management and treasury operations of multinationals typically include offshore affiliates that support certain transactions, such as new acquisitions or mergers, or that permit foreign direct investment to be financed with debt rather than equity.

OFCs need to compete with onshore institutions. On the one hand, to attract business, they tend to offer low- or zero-taxation schemes that appeal to firms seeking to cut their tax bills. To some degree, this tax competition can facilitate better resource allocation. These efforts are sometimes supported by international tax treaties. On the other hand, OFCs are cost competitive, because they frequently operate under relatively weaker regulatory and supervisory financial standards—standards that are set by the host jurisdictions. This lax operational environment translates into lower administrative and operating costs but may not be fully consistent with international best practices.

Explicit secrecy rules and weak legal and administrative frameworks—which implicitly offer identity discretion to investors—have also attracted business from those seeking outright tax evasion and money laundering, raising strong concerns in the international community.

The significant financial flows handled by OFCs have long attracted attention to their activities. Because of this, the international community—through bodies such as the Global Forum/OECD, FSB, or FATF—has increased pressure on OFCs by launching initiatives to improve their adherence to international standards. Indeed, since the late 1980s, the international community has stressed that OFCs should follow increasingly strict prudential and supervisory financial standards, prevent money laundering, and limit opportunities for tax evasion and aggressive tax minimization schemes.

Structured Investment Vehicle

Global Financial Stability Report: Apr-08

Structured finance and collateralized debt obligations, new developments in cash and synthetic securitization

The handbook of structured finance

Collateralized debt obligations and structured finance, new developments in cash and synthetic securitization