Elon Musk’s Twitter buy is embarrassing for Morgan Stanley CEO James Gorman
“Morgan Stanley will play the largest role in a consortium of 12 banks providing Musk with $12.5 billion in margin loans secured by shares in Tesla, the electric vehicle company he leads. Morgan Stanley agreed to lend $2 billion of the sum.
“The loan is far larger than what Morgan Stanley has offered wealthy individuals in the past. The largest margin loans it has offered to clients through its private bank have generally been below $1 billion. of dollars, according to a person familiar with Morgan Stanley’s lending operations..”
The FT The article was titled: “Elon Musk’s Twitter deal rewards risk-taking at Morgan Stanley.”
This turned out to be wrong. Since April, tech stocks have fallen around the world. Musk has spent months trying not to buy Twitter by publicly accusing the company of condoning fraud. When the dispute was set to go to court, he said he would move forward with the deal by October 28, although it’s unclear if he will. .
Some $3 billion of the purchase price is funded by unsecured junk bonds that the banks have already signed purchase contracts with. Junk means they are considered high risk or of lower quality.
Unsecured means there is no warranty backing them. If the borrower cannot afford the interest, the lender cannot come to their office and demand payment in desktop computers or any other business asset.
Often in such deals, the lead bank will quickly sell the debt to investors, a process they call syndication but is really rocking. The price of debt will be influenced by current interest rates. Higher rates elsewhere will make older debt less attractive.
The ability of the borrower to repay the money will also affect the price. In the case of Twitter, it is only occasionally profitable.
If Musk forces his banks to finance his purchase on Twitter, the reversal will cost them a bombshell, as Bloomberg recently reported:
“When the Morgan Stanley-led banks agreed in April to help fund Elon Musk’s purchase of Twitter Inc, they were eager to help an important client, the world’s richest person. Now neither Musk nor banks have no obvious way out.
“Lenders which also include Bank of America Corp, Barclays Plc and Mitsubishi UFJ Financial Group Inc have committed to provide $13 billion in debt financing for the deal. Their losses would be $500 million or more if the debt was to be sold now, according to Bloomberg’s calculations.
“They agreed to finance the purchase whether or not they were able to offload the debt to outside investors, according to public documents and attorneys who consulted with them.”
Embarrassing for everyone
Banks can’t just wait for the loans to be paid off and say: I told you Musk was good at this! They must “mark to market”, which means that their loans must be declared on their balance sheets at market prices. If they fall in value, it becomes a loss. This is embarrassing for everyone involved and can lead to anxiety about who the bonus should take.
Last week, Gorman’s chief financial officer, Sharon Yeshaya, was asked by a financial analyst about the deal with Twitter. “Are you increasing your risk appetite here to seize opportunities? he said. “How do you plan to manage this risk? »
Those were good questions! Here’s another: Did the Morgan Stanley investment committee meeting that decided to back Musk go like this?
Credit Analyst: You want us to loan $2 billion to a Trump-backed libertarian and his wealthy friends to buy an unprofitable social network dominated by progressives and hateful advertisers?
Investment Bankers: You’re not thinking commercially here.
Gorman: Come on guys! It’s a rocket. Let’s get on board.
Yeshaya’s response to the analyst was, in part, “I would say we’ve been extremely careful in terms of risk management.”
The rest of his comments were difficult to understand but were interpreted by Bloomberg columnist Matt Levine This way:
Morgan Stanley”Most likely did not go and sell billions of dollars of specific Twitter loan pricing risk to hedge funds, although it would be incredible if that were the case,” he wrote.
“If you’re the hedge fund manager responsible for Morgan Stanley’s losses on Twitter, get in touch.”
We would all love to hear from you.