One reason why Morgan Stanley borrowed more than any other bank during the crisis, $107 billion, is that there was a run on its prime brokerage.

Hedge funds, Morgan's main source of prime brokerage assets, were either in need of money to repay their clients, who were redeeming money, seeking revenge on John Mack, or had blown up, so they withdrew their accounts FAST, according to Bloomberg.

More on why they were mad at Mack later. First, check out how fast hedge funds pulled their billions:

-- As of September 16th 2008 7 AM: $7 billion pulled. (“Definitely some major outflows of PB balances at both GS ($5 b) and MS ($7 b),” [an assistant at the SEC, Matthew Eichner] wrote to NYFed employees on September 16 2008. “Not pretty.”)

-- As of September 16th 2008 10 PM: $20 billion pulled. (Morgan Stanley had suffered “free credit withdrawals of $20 billion over the last two days, contributing to a $23 billion decline in the parent company liquidity pool to $106 billion,” according to an email from someone at the NYFed.)

-- As of September 22 2008: $84.8 billion pulled, according to a Morgan Stanley treasurer’s report released by the crisis commission.

-- As of September 29 2008: $128.1 billion pulled

Ultimately, the amount of assets hedge funds pulled from Morgan's prime brokerage totaled $130 billion, according to Bloomberg.

August 31: $280 billion --> November 30: $150 billion.

This was a huge problem because it hurt Morgan's liquidity, increasing their chances of becoming the next Lehman.


To our knowledge, Morgan Stanley was always able to repay clients' deposits, but they also rang up a $107 billion tab with the Fed, without which, it (like every other bank) would have probably failed.

What's interesting is how much banks rely on hedge funds' assets. They use the money like it's part of their balance sheet, which might open the door for conflicts of interest. In Korea it's illegal for banks to manage a hedge funds' assets and be its prime broker, partly for this reason. In order to keep a hedge fund on as a client, banks might be tempted to find other clients to take a loss.

It's also worth noting that despite the serious concerns about its solvency, Morgan Stanley PR was busy reporting that everything was fine. Internally, that was the message too.

On September 17, after the stock plunged 24%, CEO John Mack emailed employees: “there is no rational basis for the movements in our stock...We’re in the midst of a market controlled by fear and rumors, and short-sellers are driving our stock down...we have talked to [Henry Paulson and Christopher Cox about the issue]."

Then on September 19, short-selling was temporarily banned. One of our sources says that John Mack's influence was a big reason for the ban, AND that his campaign against short selling is why hedge funds pulled their money from Morgan, for payback. The short-sale ban killed many of their trades.

Read more on that here >