Good piece on Morgan Stanley and Wall Street in general at Deal Journal.

It seems easy to view Morgan Stanley’s travails as a morality tale: Courageous chief Mack fighting off nefarious speculators in a heroic effort to save the hallowed firm. But that would be pretty much wrong.

It wasn’t a grand conspiracy that torpedoed Morgan Stanley. It was Morgan Stanley’s own hedge fund clients such as Third Point and Millennium Partners. It was Morgan Stanley’s own trading partners, Citi and Deutsche Bank among them. ...

Look at all the elements of the Morgan Stanley bear raid: a tottering trillion dollar balance sheet, an opaque credit default swap market, aggressive fast-trading hedge funds and a computerized, momentum-driven stock market with few limitations on short-selling.

This was the world created, endorsed, and milked by Morgan Stanley and the other broker-dealers.

Leverage? It was Mack who told his shareholders in April 2007 that Morgan Stanley had “the capacity to take on a lot more risk than it has in the past.”

The uptick rule? Put in place following the Crash of 1929, the rule slowed the pace of relentless short-selling. But Wall Street’s traders and hedge funds thought the rule ineffective, hindering liquidity. The SEC got rid of it in July 2007.

Credit default swaps? Wall Street and the hedge funds fought government oversight of the multi-trillion dollar market for years. Why impede critical financial innovation in such a complex and profitable market? Morgan soon became one of the Street’s largest CDS underwriters.

Yes, the broker-dealers wanted free markets – and got them. But the only freedom they really won was the freedom to destroy themselves.

That they did at an astonishing pace. Lehman, Bear Stearns and Merrill Lynch are gone. Goldman Sachs and Morgan Stanley are now banks.

And still the Wall Street travesty marches on.

I am usually a big fan of irony.  However I think I will be more appreciative of this irony a few years hence when we are no longer in the vortex of financial collapse.