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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

May 31

Written by: Donald van Deventer
5/31/2011 11:53 PM 

Today’s blog focuses on the funding shortfall that took place at Morgan Stanley during the period from February 8, 2008 to March 16, 2009. While the bankruptcy of Lehman Brothers and the rescue of Merrill Lynch by Bank of America are emphasized by many analysts of the credit crisis, the analysis below confirms that Morgan Stanley too was in severe financial distress. Today’s blog confirms that Lehman borrowed less than half as much from the Federal Reserve after its bankruptcy than Morgan Stanley did when it was at the point of highest distress.

This is the seventh case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, and Lehman Brothers.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at Morgan Stanley during the credit crisis.

The data used for Morgan Stanley in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included. 

A detailed chronology of the credit crisis through February 28, 2008 is given in this recent blog post:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog,, May 13, 2011.

The key dates in the chronology relevant to Morgan Stanley are summarized below.  The “Levin Report” refers to the bi-partisan study of the root causes of the credit crisis submitted to the U.S. Congress on April 13, 2011:

June 20, 2007
Merrill Lynch seizes $850 million in assets from the two Bear Stearns hedge funds. Merrill tries to auction the bonds, but the auction fails
June 17, 2007
Two Bear Stearns subprime hedge funds collapse (Source: Levin report, page 47)
June 21, 2007
“Bear Stearns Fund Collapse Send Shock Through CDOs” article on Bloomberg details losses on mortgage-backed securities-related CDOs
August 1, 2007
Bear Stearns' two troubled funds file for bankruptcy protection and the company freezes assets in a third fund. (Source:
August 16, 2007
Countrywide taps $11.5 billion commercial paper back up line (source: Bloomberg)
August 24, 2007
Bank of America buys $2 billion in Countrywide Financial preferred stock (Source:
October 3, 2007
Morgan Stanley cuts 600 jobs (Source:
October 5, 2007
Merrill Lynch writes down $5.5 billion in losses on subprime investments (source: Reuters)
October 17, 2007
Morgan Stanley cuts another 300 bankers in credit trading, structured products, and leveraged lending areas (Source:
October 19, 2007
Cheyne and IKB structured investment vehicles default on commercial paper (source: Bloomberg)
October 30, 2007
Merrill Lynch CEO O’Neal fired (source: Reuters)
November 5, 2007
Citigroup CEO Prince resigns after announcement that Citigroup may have to write down as much as $11 billion in bad debt from subprime loans. (Source: Bloomberg)
November 7, 2007
Morgan Stanley reports $3.7 billion in subprime losses (source: Bloomberg)
November 29, 2007
Bear Stearns cuts 650 more jobs, bringing total job cuts to 1,500, 10% of its total work force. (Source:
December 19, 2007
Morgan Stanley announces $9.4 billion in write-downs from subprime losses and a capital injection of $5 billion from a Chinese sovereign wealth fund. (Source:
January 17, 2008
Lehman Brothers cuts 1,300 jobs in its domestic mortgage division after previously cutting 2,500 jobs due to subprime lending problems. (Source:
January 17, 2008
Merrill Lynch announces net loss of $7.8 billion for 2007 due to $14.1 billion in write-downs on investments related to subprime mortgages. (Source:
February 28, 2008
AIG announces a $5.2b billion loss for the fourth quarter of 2007, its second consecutive quarterly loss. AIG announced write-downs of $11.12 billion pretax on its credit default swap portfolio. (Source:
March 24, 2008
Federal Reserve Bank of New York forms Maiden Lane I to help JPMorgan Chase acquire Bear Stearns (Source: Levin report, page 47).
May 29, 2008
Bear Stearns shareholders approve sale (Source: Levin report, page 47).
September 7, 2008
U.S. takes control of Fannie Mae & Freddie Mac (Source: Levin report, page 47).
September 15, 2008
Lehman Brothers bankruptcy (Source: Levin report, page 47).
September 15, 2008
Merrill Lynch announces sale to Bank of America (Source: Levin report, page 47).
September 16, 2008
Federal Reserve offers $85 billion credit line to AIG; Reserve Primary Money Fund NAV falls below $1 (Source: Levin report, page 47).
September 21, 2008
Goldman Sachs and Morgan Stanley convert to bank holding companies (Source: Levin report, page 47).
September 25, 2008
Washington Mutual fails, seized by FDIC, sold to JPMorgan Chase (Source: Levin report, page 47).
October 3, 2008
Congress and President Bush establish Troubled Asset Relief Program (Source: Levin report, page 47).
October 13, 2008
Morgan Stanley issued to Mitsubishi UFJ Financial Group 7,839,209 shares of Series B Non-Cumulative Non-Voting Perpetual Convertible Preferred Stock for an aggregate purchase price of $7.8 billion plus $1.2 billion in non-convertible preferred stock. (Source: October 16, 2008 and October 10, 2009 investor presentation by Morgan Stanley CFO Colm Kelleher)
October 28, 2008
U.S. uses TARP to buy $125 billion in preferred stock at 9 banks (Source: Levin report, page 47).

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to Morgan Stanley during the period February 8, 2008 to March 16, 2009. Morgan Stanley’s borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing $2 billion on March 17, 2008, with borrowings continuously outstanding from September 15, 2008 to February 12, 2009.
Average from
2/8/2008 to 3/16/2009
7.2 billion
Average when Drawn
16.2 billion
Maximum Drawn
$61.3 billion on September 29, 2008
Number of Days with
Outstanding Borrowings

The graph below shows the Morgan Stanley 1 month (yellow line) and 1 year default probabilities (blue line) for the Jarrow-Chava version 5.0 default probability models from Kamakura Risk Information Services. Note that the default probabilities for Morgan Stanley continued to rise in November and December, after the September 14, 2008 bankruptcy filing by Lehman Brothers. Ultimately the 1 month default probability for Morgan Stanley peaked at over 14%.

Morgan Stanley’s first borrowing from the Federal Reserve was $2.0 billion on March 17, 2008, which was one day earlier than Lehman’s first borrowing and $400 million more than Lehman borrowed on March 18. Lehman’s peak borrowing prior to filing for bankruptcy was $2.73 billion on March 24, 2008, but Morgan Stanley’s peak borrowing was $61.3 billion on September 29, 2008. The Federal Reserve reported that Lehman had outstanding borrowings from the Federal Reserve on only 10 days prior to its bankruptcy filing on September 14, 2008, but Morgan Stanley had borrowings outstanding for 180 days. The graph below shows the dramatic spike in Morgan Stanley’s borrowings from the Federal Reserve.

After funding needs peaked at $61.3 billion on September 29, 2008, Morgan Stanley received a capital injection of $10 billion under the Capital Purchase Program on October 28, 2008 (Source: Office of the Special Inspector General for the Troubled Asset Relief Program, “Emergency Capital Injections Provided to Support the Viability of Bank of America, Other Major Banks, and the U.S. Financial System,” October 5, 2009, page 20-22.)  Morgan Stanley began borrowing under the Commercial Paper Funding Facility in late October, as shown below.  Finally, as noted in the time line above, Morgan Stanley issued $7.8 billion in convertible preferred stock and $1.2 billion in non-convertible preferred stock to Mitsubishi UFJ Financial Group on October 13, 2008. 

In the chart below, we compare Morgan Stanley’s funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  Morgan Stanley’s average drawn borrowing of $16.2 billion ranks second among the firms analyzed so far, trailing only AIG.

If one ranks the same firms by largest outstanding borrowing on a single day, Morgan Stanley again ranks second, with a peak borrowing of $61.3 billion, after AIG.

Morgan Stanley began borrowing under the Commercial Paper Funding Facility on October 27, 2008 and did a total of 22 transactions which are listed here:

Implications of Funding Shortfall Data

Morgan Stanley’s peak funding shortfall of $61.3 billion was more than double the $28 billion funding shortfall at Lehman Brothers on September 15, 2008, the day after Lehman Brothers filed for bankruptcy.  As noted in our May 31, 2008 blog on Lehman, it is clear that the U.S. government dramatically revised its decision making on which firms were too big to fail in the aftermath of the Lehman Brothers bankruptcy.  If the definition of “too big to fail” that was in place on September 14, 2008 had remained unchanged, it is very likely that Morgan Stanley would have failed as well.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
June 1, 2011