RISK AND REWARD
MS loans pay off
Morgan Stanley revealed Tuesday that it’s making a bundle selling risky loans that allow its clients to use stocks and bonds as collateral.
The Wall Street goliath saw its best ever quarter for socalled securities-based loans, which have raised concerns because they can slam investors if there’s a sharp market downturn.
The financial powerhouse headed by James Gorman said Tuesday its overall profits rose 12 percent during the third quarter to $1.78 billion, boosted by its business in managing money for its ultrawealthy clients.
The bank also reported $40.1 million in income from securities-based loans, up 18 percent from last year, the most ever — and just six months after the bank paid a $1 million fine for securities-based loan sales contests that The Post first exposed last year.
The loans are more dangerous for investors in part because they have very few restrictions — borrowers don’t even have to chip away at paying them back like they would with credit cards. But banks make easy money, and brokers get a cut, too. That wouldn’t be the case with other kinds of credit.
In a Tuesday conference call with analysts, Gorman sounded defensive about the sales of the loans — and he suggested the bank was only going to sell more.
“The lending side provides a lot of stickiness with relationships,” Gorman said. “People want access to credit. They have large illiquid positions or concentrated stock in businesses they’ve founded, and they don’t necessarily want to liquidate that. And we’re in a position where we’re dealing with a lot of very, very wealthy people.”
The Post reported in April that the loans are scaring some bankers, because they can hold severe risks for individual investors.
The loans have gotten more popular as stock indexes reach all-time highs on a seemingly daily basis. But more on Wall Street — including higher-ups at Morgan Stanley — are warning that a market selloff could be looming.
“Near term, a correction is looking more likely,” the bank’s chief US equity strategist and chief investment officer, Michael J. Wilson, wrote in a Tuesday note.
Separately on Tuesday, Goldman Sachs reported a 26 percent drop in quarterly trading for bonds, currencies and commodities — its bread and butter.
Still, that was in line with the rest of a lukewarm Wall Street. The drop in trading, while steep, was less than what analysts had expected and was better than the 40 percent plunge it reported in the second quarter.