A Tranche Bites Morgan Stanley !

Morgan Stanley declares a bigger write-off in todays conference call:

…they decided to take this $7.8 billion writedown instead of the estimated $3.7 billion writedown detailed on Nov. 7. “Virtually all writedowns were the result of trading by a single desk in our mortgages business.

Then they say something curious:

Mr. Kelleher details the subprime trading position that caused the losses, saying the firm elected to short the lowest-rated tranche of subprime to the tune of $2 billion, but decided to “cover the cost of negative carry by going long the $14 billion super-senior tranche.” As the value of these positions declined, the company ended losing a ton.

There’s a book, A Demon of Our Own Design written by Richard Bookstaber, a guy that was intimately involved with risk control. He writes that many times the trading desk had it right and management got cold feet and made the traders cut the position or hedge it. Sounds to me that this is what happened at Morgan Stanley and it ended with a writedown of $7.8 Billion!

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