Morgan Stanley shares sink on worries about future

ByABC News
October 12, 2008, 12:46 PM

NEW YORK -- Friday marked the fifth straight day that shares of the nation's second-largest investment bank have been pummeled. The latest round of selling was triggered on renewed fear that Morgan Stanley's credit ratings might be cut, a move that threatens earnings power.

The potential for a downgrade heightens pressure on Chief Executive John Mack, who spent most of Friday meeting with major investors to reassure them about the firm. Most of Wall Street remains painfully aware that many of Morgan Stanley's rivals have either collapsed or been sold off as confidence in the financial industry plummeted.

And, analysts on Friday agreed that Morgan Stanley's shares have come under intense pressure more on fear than any real problems with the bank. Investors wiped away about $18 billion of value in Morgan Stanley in the past week, with shares closed down $2.77, or 22.3%, to $9.68 after sinking to a 52-week low of $6.71 earlier in the session.

"Morgan Stanley shares have been under extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet, and long-term earnings prospects are sound," said David Trone, an analyst with Fox-Pitt Kelton. "We expect the firm to get major funding support from Mitsubishi, with details to emerge on Tuesday when the transaction is formally closed."

The steep drop in the investment bank's market value is reminiscent of what happened to both Lehman Brothers and Bear Stearns, said Ladenburg Thalmann analyst Richard Bove in a research note. Short selling has been cited as a reason Lehman filed for bankruptcy protection and for Bear Stearns being acquired by JPMorgan Chase in a fire sale.

He said there is some indication that short sellers, who bet on stocks falling instead of rising, might be putting pressure on shares. On Thursday, a three-week ban on short selling expired.