Hedge Funds Flee Morgan Stanley Prime Brokerage

Sep 18 2008 | 9:16am ET

Like rats fleeing a sinking ship, hedge funds are yanking their prime brokerage accounts from Morgan Stanley before it becomes the next Wall Street casualty.

Hedge funds accounting for less than 10% of Morgan Stanley’s prime brokerage balances have withdrawn their money or informed the firm they plan to do so, Bloomberg News reports. The departures came amid market rumors that Morgan Stanley, which along with Goldman Sachs is the largest prime broker, would be the next Bear Stearns or Lehman Brothers, but before news broke that it may be trying to become the next Merrill Lynch.

Morgan Stanley shares have fallen more than 40% in recent days, and the firm is reportedly in talks with several banks, notably Wachovia Corp., about a merger.

The firm’s clients have apparently gone over to Citigroup, Credit Suisse Group, Deutsche Bank and JPMorgan Chase. A Morgan Stanley spokesman told Bloomberg that the firm’s prime brokerage assets are a minimal amount of its liquidity.

When Lehman filed for bankruptcy earlier this week, billions of dollars in prime brokerage assets were frozen for the “short term,” according to administrator PricewaterhouseCoopers.

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