Morgan Stanley shares hit a new multi-year low on Monday as investors became more worried about its exposure to troubled banks and governments in Europe.
Shares of the second-largest U.S. investment bank fell as much as 8.4 percent to a low of $12.37 in afternoon trading. The last time its shares traded that low was December 2008.
Other large U.S. bank stocks also fell. Goldman Sachs Group Inc was down 3.8 percent at $90.93, Bank of America Corp was down 8.3 percent at $5.61, Citigroup Inc was down 9.1 percent at $23.27. The NYSE Arca Securities Broker/Dealer Index, which includes Morgan Stanley, was down 3.6 percent.
A closely-watched indicator in the bond market also signaled stress for Morgan Stanley.
The bid price for five-year credit default swaps, which hedge against the bank defaulting on its obligations, climbed to $540,000 for every $10 million worth of debt, according to Markit data, up 13.7 percent from Friday. A higher price indicates greater fear about a company's health.
Investors have grown increasingly worried over the past two weeks about Morgan Stanley's exposure to European debt.
The problem with Morgan Stanley is that everybody's saying they're more exposed to Europe than all the other banks, said Jamie Lissette, founder of The Hammerstone Group, a Westport, Connecticut-based firm that operates discussion forums for investors. Who knows if it's true or not, but everybody pounces on things like this because there's always smoke where there's fire.
Analysts have been quick to say that figures on Morgan Stanley's exposure to European banks and countries are outdated and possibly misleading. But the lack of more solid information regarding potential credit losses has led many investors to sell first and ask questions later. Morgan Stanley shares dropped more than 10 percent on Friday over such concerns.
We believe Morgan Stanley's exposure has been overly discounted by the market in recent weeks, Wells Fargo analyst Matthew Burnell said in a report on Monday, arguing that investors were reacting to sparse data and that the bank's exposure to Europe is manageable.
Some investors have seized on year-end figures that showed Morgan Stanley's gross exposure to Europe was far greater than its current market value or stated book value.
Yet many analysts have pointed out that those cross-border outstandings can make exposure to countries and foreign banks appear inflated. The figures include cash balances of Morgan Stanley clients that can be easily liquidated, but do not factor in the collateral that its counterparties hold against trades or bank's own hedges against counterparty risk.
Burnell, who rates Morgan Stanley shares market perform, estimates that the bank's net exposure to credit risk in France is $1.4 billion, compared with a cross-border exposure figure of $44.7 billion as of December 31.
Investors are worried that Morgan Stanley may lose money on its holdings of European assets, as well as its business dealings with banks and governments there.
On Monday, Greece said it will miss deficit targets for the year, fueling concerns about a possible default. Shares of Franco-Belgian financial group Dexia dropped 10 percent on concerns about its Greek exposure and a Moody's warning about its liquidity position.
Morgan Stanley is in a quiet period before earnings, but is expected to release details about its exposure to Europe when it reports third-quarter results this month.