The WSJ.com reports ~~~~ ” Amid the uncertainty that Sept. 16, Millennium Partners LP, a hedge fund with $13.5 billion in assets, asked to pull out $800 million of the more than $1 billion of assets it kept at Morgan Stanley, according to people familiar with the withdrawals. Separately, Millennium had also shorted Morgan Stanley’s stock, part of a series of bearish bets on financial firms, said one of these people. In addition, the hedge fund bought “puts,” which gave it the right to sell Morgan shares at a set price in the future.
“Listen, we have to protect our assets,” Israel Englander, Millennium’s head, told a Morgan Stanley executive, according to one person familiar with the conversation. “This is not a personal thing.”…
… On the morning of Sept. 17, David “Tiger” Williams, head of Williams Trading LLC, which offers trading services to hedge funds, heard from one of his traders that a fund had moved an $800 million trading account from Morgan Stanley to a rival. His trader, who was on the phone with the fund manager who moved the money, asked why. Morgan Stanley was going bankrupt, his client responded.
Pressed for details, the fund manager repeated the rumor about Deutsche Bank yanking a $25 billion credit line. Mr. Williams hit the phones. His market sources told him they thought the rumor false.
But damage already was being done. By 7:10 that morning, a Deutsche Bank trader was quoting a price of $750,000 to buy protection on $10 million of Morgan Stanley debt. At 10 a.m., Citigroup and other dealers were quoting prices of $890,000….
…The stock and swaps trading were feeding on each other. That afternoon, Mr. Schorr, the UBS analyst, wrote: “Stop the insanity — we need a time out.” In an interview that day, he said “the negative feedback loop of stocks and CDS making each other crazy shouldn’t be able to destroy the value of companies.”
Scrambling to stop the crisis of confidence, Mr. Mack phoned Paul Calello, investment-banking chief at Credit Suisse, and asked whether he knew what was driving the cost of the swaps up so quickly, say people familiar with the call. Mr. Calello said he didn’t.
Morgan Stanley’s chief legal officer, Gary Lynch, once the SEC’s enforcement chief, called New York Stock Exchange regulatory head Richard Ketchum. He said he was suspicious about manipulation of Morgan Stanley securities, and asked whether the NYSE would support a temporary ban on short selling, according to people familiar with the call.
Mr. Mack called SEC Chairman Christopher Cox, Treasury Secretary Henry Paulson and others. Trading in Morgan Stanley securities, he groused, was irrational and “outrageous,” and “there’s nothing to warrant this kind of reaction,” says a person familiar with the calls. The steps already taken by the SEC to prevent certain types of abusive short selling, he argued, didn’t go far enough.
In his memo to employees that day, Mr. Mack had made it clear that he intended to press regulators to rein in short sellers. When word about that got out, hedge-fund managers were up in arms. Some yanked business from Morgan Stanley, moving it to rivals including Credit Suisse, Deutsche Bank and J.P. Morgan. They said the trading represented legitimate protection and speculation….
…Hedge-fund veteran Julian Robertson Jr. and James Chanos, a well-known short seller, both longtime Morgan Stanley clients, were both angry. Mr. Chanos says he “hit the roof” when he heard about Mr. Mack’s memo.
After the stock market closed that day, Mr. Chanos decided that his hedge fund, Kynikos Associates, would pull more than $1 billion of its money from a Morgan Stanley account.
“It’s one thing to complain, but another to put out a memo blaming your clients,” says Mr. Chanos, who adds that the development all but ended a more-than-20-year relationship with Morgan Stanley. He says his fund hadn’t bought any Morgan Stanley swaps or sold short its stock.
Other Wall Street executives, concerned about their stocks, were also calling regulators. At about 8:15 that night, the SEC said it would require more disclosure of short selling. Late the following day, Sept. 18, the SEC moved to temporarily ban short selling in financial stocks.
Mr. Mack contacted hedge-fund clients to tell them he hadn’t single-handedly brought on the ban, and that he was primarily interested in giving the market a temporary “time out” from the volatile mix of rumors and trading.
But within days, more than three-quarters of Morgan Stanley’s roughly 1,100 hedge-fund clients had put in requests to pull some or all of their assets from the firm, according to a person familiar with the operation. Even though most kept some money at the firm, Morgan Stanley couldn’t process all the withdrawal requests at once, adding to market fear….” ~~~~
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