Morgan Stanley brokerage loses a third of its assets as hedge funds flee

26 September 2008

Mumbai: Morgan Stanley lost nearly a third of its assets in its prime brokerage last week as worried hedge funds moved hundreds of billions of dollars to rival banks, fearing that Morgan Stanley could go the Lehman Brothers way, newspaper reports said.

''Many of the world's biggest hedge funds moved their assets to commercial banks regarded as safer last week, as they and their investors worried that Morgan Stanley could follow Lehman into trouble,''' the Financial Times said.

The prime brokerage – the world's biggest – is one of Morgan Stanley's most profitable and successful businesses and the withdrawal of assets by clients will restrict its ability to loans and make Morgan Stanley's business less profitable, sources pointed out.

The prime brokerage business reported record quarterly profits this week and it seems to have stabilised after the proposed US government bailout led to soaring markets.

The flight of cash and stock out of the division occurred as spreads in the credit default swap market ballooned, but has since slowed to a trickle.

Several of Morgan Stanley's hedge fund clients said they were likely to return to the bank once markets stabilised.