October 28, 2008 / 4:10 PM / 10 years ago

Goldman, Morgan Stanley shares fall on VW exposure talk

NEW YORK (Reuters) - Shares of Morgan Stanley and Goldman Sachs Group Inc tumbled on Tuesday on speculation the banks might be caught on the wrong side of a trade involving German automaker Volkswagen AG, traders said.

Morgan Stanley shares were down $1.67, or 12 percent, at $12.06 after falling as low as $10.15. Goldman slid $5.98, or 6.3 percent, to $87.01, after dropping as low as $82.24.

Morgan Stanley spokesman Mark Lake said the company does not have any exposure to Volkswagen. Goldman declined to comment, citing its policy of not responding to market speculation.

Sources inside Goldman told Reuters the company had no significant losses tied to Volkswagen.

“There have been several ‘black swan’ events occurring in the markets, and there are concerns that they will lead to large losses,” said James Ellman, president of Seacliff Capital. He said he does not have positions in Goldman or Morgan Stanley.

“Black Swan” events are considered hard to predict and sometimes appear to have elements of randomness.

Earlier Tuesday, Volkswagen briefly became the world’s largest company by market value, following weekend news that Porsche Automobile Holding SE had taken a stake of more than 74 percent after buying much of the floating stock.

This prompted a short squeeze, forcing investors who had bet on a decline in VW shares to buy the stock. Shares of Societe Generale, the French bank, fell as much as 17.5 percent on speculation it also made a bad bet on VW stock.

David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said Morgan Stanley shares might also be down because of “problematic ‘self-fulfilling fear.’”

“Like peers that have either gone bankrupt or were forced to sell, we believe fundamentals were sound enough to overcome problem asset exposures, but there is no antidote for unbridled fear,” Trone wrote. “Trading counterparties are crucial, because this revenue flow keeps the lights on.”

Meanwhile, the cost to insure Goldman and Morgan Stanley debt rose. Credit default swaps on Goldman widened 15 basis points to 310 basis points, or $310,000 per year for five years to insure $10 million of debt, according to Phoenix Partners Group said. For Morgan Stanley, the cost widened 15 basis points to 415 basis points.

Reporting by Karen Brettell, Elinor Comlay, Juan Lagorio, Christian Plumb and and Dan Wilchins; Writing by Jonathan Stempel; Editing by Jeffrey Benkoe

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