MS, technically speaking, is classified as insolvent based on mark-to-market valuation. By selling off non-core assets, MS has been able to “reduce its European exposure” through the manipulation of hedge funds and allocation of funds to failing financial corporations. Some mainstream media outlets tout that the Federal Reserve Bank will come in and assist MS in their insolvency and that MS “just isn’t going out of business anytime soon.”
However, on the bond market, MS is being treated like “a junk-rated company.” Moody’s the rating agency that sells their ratings to whomever will pay for a triple A score, have announced they will downgradge MS’ ratings which would put all US banks at risk.
Otis Caset, director of credit research at Markit confirms: “What has driven that, obviously, is Europe. The perception is — correctly or incorrectly — that Morgan Stanley is one of the U.S. banks most exposed to Europe’s problems.”
The SMG ruling means that the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SPIC) regulatory systems will not insure customer funds, investments, depositors and retirees who hold accounts in banks.
In fact, the banking institution is now legally allowed to use those customer funds deposited as collateral, payment on debts for loans made, or free use on the stock market to purchase investments as the bank sees fit.
When a customer deposits money into a bank, the bank issues a promise to have those funds available when the customer returns to withdraw the deposited amount.
With the SMG ruling, those funds become property of the bank once they are deposited. If the bank is insolvent, under duress or filed bankruptcy, those customer deposited funds can be co-mingled with the bank’s funds and used for the purposes of the bank without recourse to the customer.