Goldman Sachs (GS) and Morgan Stanley (MS) stock prices have shown the highest correlation to a sample of large European banks among U.S.-based financial institutions in 2012, according to a report published Friday by BernsteinResearch.
The high correlation of Morgan Stanley and Goldman to Europe relative to other U.S. institutions is in some respects surprising, given, for example, that JPMorgan shows much higher credit default swaps exposure to countries on the European periphery: Portugal, Ireland, Italy, Greece and Spain.
However, Hintz points to the 2008-2009 crisis, when “investors worldwide were shocked to realize that the major capital markets banks around the world were tightly linked together through their over the counter derivatives books.”
Further lessons from the crisis, Hintz contends, were that “liquid markets can become illiquid, all trading positions are correlated in a tail event, hedges rely on correlations or assumptions of liquidity that may be lacking in a crisis, all short term funding is suspect and even secured short term funding can fail, and only common equity has value.”
The sum of all of these lessons, according to Hintz, is that “Morgan Stanley and Goldman Sachs face investor skepticism that is difficult to overcome in today’s uncertain geopolitical environments.”
Referring to Morgan Stanley and Goldman as “honorary European banks,” Hintz observes that “needless to say this is an ‘award’ that [the two securities dealers]would prefer not to win.”