The subprime mess is turning out to be a minefield for investment banks.
The latest casualty is Morgan Stanley, the investment banking house, which took a staggering $9.4 billion charge for the 4th quarter due to investments in subprime instruments. The company has now taken close to $11 billion in write-downs due to these investments.
John Mack, its CEO, fell on his sword and accepted responsibility for the firm’s big loss. Imagine that!
So unusual has it become for executives and politicians to accept responsibility for anything that happens on their watch, that one almost feels sorry for Mr. Mack forgoing his bonus this year. He’ll only take home about $800,000 this year in salary, according to the New York Times.
Because of the tremendousness of this loss, Morgan Stanley became yet another of America’s golden names that was forced to sell off a piece of itself in order to restore the flooring in its financial house. In this case it was an investment arm of the Chinese government that bought a $5 billion stake.
Citigroup sold a stake to Dubai to shore up its finances as did UBS to Singapore. All of these governments are acting selflessly, forgoing seats on the boards of the companies in which they’ve invested billions. (It’s not often that one sees the words ‘government’ and ‘selflessly’ in one sentence, but hey, who am I to question the integrity of these sovereign states?)
The Times quoted a ditty which it said was making the rounds on trading floors lately. It goes like this: “Shanghai, Dubai, Mumbai or good-bye.”
What’s becoming clear amidst the smoldering ruins (and this is before all the bombs have exploded) is that no one knew–with the exception, perhaps, of Goldman Sachs and Bank of America–what they were doing when it came to these exotic and incredibly complex investments backed by subprime mortgages.