The Perfect Encapsulation Of What Has Gone Wrong With Eurodollars And Why It Will Continue

To this point, I have refrained from presenting Morgan Stanley’s balance sheet reporting on gross derivative exposures because, quite frankly, it fits too perfectly. The bank follows the wholesale “dollar” narrative so closely that it almost seems too good (bad for the financialized economy) to be true, and thus almost diminishes the value of the evidence by extension. Because of that, I have focused mainly on the other dealers as they mostly apply, and thus largely present compelling corroborative, anecdotal evidence.

Morgan Stanley has now forced itself into the conversation, and again it is almost too perfect. Yesterday, the Wall Street Journal reported rumors that the bank is about to tear into, what else, FICC; deeply:

Morgan Stanley plans to slash hundreds of jobs from its debt and currencies division, people familiar with the matter said, revealing that the Wall Street firm believes that a monthslong slump in trading revenue may persist.

It wasn’t necessarily a surprise given that the firm reported 42% drop in FICC revenue in Q3. Thus, as with all the other dealers, cutting resources dedicated to “bond trading” is a statement about the state of eurodollar money supply and the profitability that once dominated each firm. These banks will ride out temporary revenue shifts and macro environments that may leave income statements gashed in any particular quarter or two, but to offer huge reductions across the firm’s global trading platform is a nod toward permanency.

As per usual, the Journal is quite careful to note the role of regulations, but CEO James Gorman was far more (perfectly) blunt. This is, as always, about profit opportunity and that ship has sailed for the foreseeable future.

“The trick for us is to size our business appropriately to what we think the fee pool is,” he [Gorman] said at the conference. While trying to gauge that, the investment bank needs to keep the unit “credibly sized” to complete globally, and “make sure we have enough flex or leverage that when the markets recover, which we do think they’ll recover, you’ll be able to participate in the upside of that,” he said. [emphasis added]