Morgan Stanley De-TARPs

On Aug 6, 2009, Morgan Stanley (MS) declared that it has decided to redeem warrants from the U.S. Treasury for $950 million to buy its stock.

The decision indicates the company’s intention to free itself from the government bailout program. The current payment will redeem the warrant, which was previously issued as part of the loan MS received under the Troubled Asset Relief Program (TARP). As part of TARP, the company received $10 billion in loans to strengthen its balance sheet during the height of the crisis in the market.

Including this amount and dividends, the company will pay a total of $1,268 million to the Treasury for its investment. In June, Morgan Stanley repaid the $10 billion loan to redeem the outstanding preferred shares.

Most banks still have short-term debt guaranteed by the government. However, some large financial firms that have redeemed warrants issued under TARP are Bank of New York Mellon Corporation (BK), Goldman Sachs Group Inc. (GS), U.S. Bancorp (USB), American Express (AXP), BB&T Corporation (BBT) and State Street Corporation (STT).

We think revenue visibility for Morgan Stanley’s investment banking and trading will be limited in the near term due to current market conditions. Also the shape of the bottom line will depend on near-term economic trends.

However, the repayment of TARP money will be of some relief on the preferred dividend payment front. We expect that, in the long run, the company will emerge from this critical environment and become more competitive.

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