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Stock tickers light up Morgan Stanley headquarters in New York. (Mark Lennihan/AP)
Stock tickers light up Morgan Stanley headquarters in New York. (Mark Lennihan/AP)

The market panic in a nutshell Add to ...

Want to know the root of all this market fear? Look no further than Morgan Stanley’s balance sheet.

Although Morgan Stanley has been credited with de-risking and being one of the safer American banks, relative to Bank of America and the like, Zero Hedge took at a look at the bank’s financial statements. The exposure to French banks is shocking.

In last year’s 10-K, Morgan Stanley disclosed an exposure of $39-billion (U.S.) as of Dec. 31. The next highest foreign exposure was $12.5-billion to Japan. (These “claims include cash, receivables, securities purchased under agreements to resell, securities borrowed and cash trading instruments but exclude derivative instruments and commitments.”) To see for yourself, check out pg. 114 of the 10-K.

The reported French exposure is 56 per cent more than Morgan Stanley's entire market cap, Zero Hedge pointed out.

Being exposed to French banks is particularly scary right now, because it has been well reported that they are extremely vulnerable to a Greek default. While it’s hard to tell exactly how much of the exposure is owed to Morgan Stanley, rather owed by Morgan Stanley to French banks, that’s kind of the whole point. The exact amounts owed by banks to other banks is very hard to pinpoint, and that creates a panic.

The same thing played out in 2008 when Lehman Brothers collapsed. No one knew just how much exposure other financial institutions had to it. And then investors tried to figure out the connections among banks, which proved to be an endless web.

It should be noted that Morgan Stanley’s exposure could be much lower than $39-billion now. But no one knows, because it only reports it annually. (Again, the confusion.)

For what it’s worth, Morgan Stanley’s Canadian bank exposure wasn’t material enough to disclose last year, but it hit $2-billion in 2009.

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