Morgan Stanley's 13% Payout Offer To Short Ford Stock (EXCLUSIVE)

Morgan Stanley was offering Ford shareholders a highly unusual deal on Monday.

Two days before Ford announced a major debt restructuring that diluted shareholders, TARP-recipient Morgan Stanley was asking its private wealth clients who owned shares in the Detroit car company whether they could use those shares to execute short sales.

In a short sale, the short-seller "borrows" securities, then sells it, on the belief the stock price will fall. The short-seller then repurchases the securities at the new, lower price, and returns it to the lender. In this way, the short-seller profits from selling the borrowed securities for more than he later repurchases them for.

According to an email obtained by the Huffington Post, a Morgan Stanley financial advisor sent a letter to a private wealth management client who owns several thousand shares of Ford stock, asking permission to use the stock for short-sales. In the email, Morgan Stanley Stock Services indicates it would pay the client 13% on the dollar value of the stock borrowed, annualized.

This is unusual for several reasons:

Normally, financial firms can borrow securities to execute short sales without telling their clients, but this client had requested that his securities not be used for this purpose, prompting the email.

In addition, with interest rates so low, the 13% is, according to the client, a pricey fee. Traditionally, financial firms do not pay their clients any fee when they use their shares to execute short sales.

"With T-bills at a half of a percent, they were willing to pay over 20 times what I am getting for my cash," the client said. "This was a major enticement to build a shorting position. They were clear in that intent in the email."

Morgan Stanley had no immediate comment on the story.

Comments

[Viper]

Just bring back the uptick rule for short sales that put short seller in charge instead of investors...

It worked for decades. And its unfair since SEP/IRA investors are not allowed to short sale...

Regards

[research]

Agreed, have to ban leveraged CDS and Shorts too.

[Hank10303]

Isn't this insider trading; I mean the investment firm has private knowledge of about Ford's debt restructuring. They then go on a hunt for clients that have Ford stock to set up a short sell program. All based on knowledge that the public didn't have. What say you Bernie Frank?

[zukervati]

Precisely, but they don't want the general public to think that, do they? This wink wink nod nod, let's see who has the "seat" at the Exchange to circumvent the SEC oversight has lead to an unprecedented amount of thievery and insider trading - especially the post-Reagan deregulation. The only time the rest of us start participating is when the toe-tag is already tied to the market in the depression morgue!

In the recent memory one can see the irrational behavior that overtook all our collective senses - remember the chic who said that NASDAQ would hit 12K or Redhat's stock in the stratosphere, with no P/E to show for! Then, of course, the housing bubble and its manipulation in the form for fancy "instruments". Chronologically - fomentation/hype initiated by the "reputable" rating agencies, propagated by the Exchange "seat" holders, blessing/o­bfuscation by the likes of Rick Santelli over at CNBC/Bloombergs/Fox Business (since they're too lazy to check it for real or are wedded to the "free market" idea) and then finally pushed to the masses by the "boiler room" hordes at the Street or across the Hudson.

Casino Capitalism at its Acme. I only hope this time we've learned our lessons and the next generation is sensitized to the conniving ways of the "money changers" and the importance of regulation - we've built checks and balances in our governance, but the financial sector has run amok for decades. Time to tame this shrew!

[lorita]

deregulation is the downfall of our economy. who is there to keep these people honest? and now that wall street has tasted the greed, there is no going back until we regulate and change the laws...

good luck doing that...there is such resistance now, as if the very act of regulation is socialism, that we're in this hell for good. of course obama will ultimately get blamed for not being able to pull us out of this mess, which will work for the republicans in the future, creating more of the same that we have now (they got us here in the first place) until only the wealthy win....

republicans believe in an inherent right to wealth, especially if you get it by the quickest, meanest tactics...which ultimately is a sign of greatness and revered in our society as a whole. it's the american dream after all...prey [sic] at the alter of capitalism, get the most and you're a hero. A MAN...

the system is a failure, just like communism was, when used to the extreme...we have passed the point of no return and there is nothing that our current administration can do, since they keep back-pedaling and trying to get "everyone" on board. forget bi-partisa­nship...we are beyond that.

nero is tuning his violin, it's only a matter of time...

[starlady7]

There should be a freeze on "Short Selling"! They are intentionally undermining a company that is trying to recover! We NEED to stop this!!!

[blood1]

Illegal - NO, according to some of these comments
Immoral - depends on if you are interested in making a profit at the same time that you are putting another company, and in this case, an industry at risk.

It seems as if Wall Street brokers are willing to "eat their own" to make a short term gain...otherwise why would GE stocks tumble...as the economic news of lower than expected profits should not bring down a "bell weather" company. GE is posed to get big dollars from their wind turbines...maybe these brokers are banking on a huge profit by buying GE on the cheap.

If these are the methods now in use, as their derivatives and credit default swaps and other computer models have failed, then one only wonders about their morality...but as a movie noted: Greed is Good.

The only question left is who will be left standing? Maybe this is those in the top 5% are sending a message to we in the 95% - we don't care!?

[SharonWantsToTalk]

They absolutly are sending that message loud and clear. Jail. The perpetrators in this economic collapse need to go to jail. It will have a greater effect than any regulation. Not to mention restoring consumer confidence. It would give great satisfaction to non wall street consumers to see these criminals behind bars. Even before this latest stint, white collar crime cost more to taxpayers than blue collar.

[1ladybug]

Interesting article about Cramer manipulating stock prices, shorts, and phantoms on Daily Kos.

[AngerAndDetermination]

The short sellers are the ones driving the market down now. They are not "experts," nor are they "the job creators." They can neither predict the market nor control the market. They are unscrupulous opportunists, leeches who simply react to the market faster than the rest of us because of their physical proximity.

And they are all Republicans.

[Chapmanp2]

This is classic Enron "pump & dump" tactics. You'd think that we would have learned our lesson after Enron, but instead of making it harder to execute these scams, we've made it legal. You'd also think that given the temperature & the volatility the traders would have enough self discipline to not destroy the market. Aparently the nature of most of these guys appears to be get rich now, me first, screw the world...

[essbird]

I understand short selling = betting on a loser, but what is the real difference in the market between me borrowing your share, selling high, buying low and returning it, or you selling your own share high and re-buying it low if you think it's going to go down? Isn't that what day traders do all the time, gamble on direction?

[1ladybug]

it may be just fine until you controll the media and the messages being put out there that can drive the price of the stock up or down artificially.

[essbird]

Understood, Ladybug, but day traders do this all the time too, just with their own stuff. The media control, insider trading, and other manipulation techniques are destructive, but I think they apply equally to day traders and shorters.

How about this? Let's tax the #^$@* out of short-term capital gains, and back off the long-term CG tax? Would that not encourage buy-and-hold, long-term success and discourage short-term opportunism? And encourage people to get back in the market knowing they won't be skun by manipulators?

[roberthuff]

The ethical question on short selling has to do with basic supply and demand. Say I have one unique item, and you are the only person in the world who wants it. The price at which I sell it to you is the market's natural price point. However if i borrow it from you and try to sell it again, there is no one else who wants to buy it, making its market value zero.

In the larger sense of things, if there are 100 million shares of a stock, and everyone who wants to own it does so, you simply need to short a small percentage of that stock to drive the price down. In the case of bank and auto stocks, the only people who want to own them long term are already in or waiting for a show of strength In the meantime, it takes very little effort to short the stock, scare more investors into selling, and capturing the profit..

[adoantarel]

For all the IB, business supporters:

Is there a moral component to this? Forget legal or common. Is it right for MS to short sell the stock and lower the value of Ford, the last American automaker to be staying afloat in this market? Do investors have any moral responsibility to support the other sectors of the economy? Or is it all fair as long as a profit is made?

I worry that the financial sector is killing itself. I support wall street if it makes money making loans, investing in the growth of industry, and building new business and tech. But the short-sellers and corporate raiders seem to be putting people out of work, destroying industry to enrich themselves. That makes wall street look less like a necessity to the economy and more like its enemy.

[Harddaysnight]

Well, there is an easier way to make things better

http://www.flickr.com/photos/coyote2012/3328598465/

[findmind]

Thanks to these people on wall street...stock values have very little REAL value left in them...these guys pump up stock for a few days to make a quick buck...then dump them. Stocks used to mean that you believed in a company, you believed that they produced a good product... had a good service, that would be profitable. It means nothing now...nothing. Wall Street is nothing but a casino now.

[hlk46]

As someone who knows nothing about this type of thing, please explain how this could impact my parent's 7000 shares of Ford stock.

[iblogleft]

They should ban shorts in this market.

[chicago25624]

But apparently, NOT ILLEGAL.