Morgan Stanley in a legal mess, and just how high could rates go 4/11/24

0:01Live in the Nasdaq market side in the heart of New York City's Times Square. This is Fast Money. Here's what's untapped tonight. Under fire, the Wall Street Journal reporting Morgan Stanley is being probed by multiple federal regulators. The stock down sharply on concerns of how the firm is vetting wealthy clients, the source of their funds, and potential money laundering. We'll have the latest. Plus, Panda Plunge, how an S &P 500 company with a market cap of nearly$10 billion lost more than half its value today. And all because of a report from a short seller named Fuzzy Panda. The details straight ahead.

0:33And later, Apple's effort to goose Mac sales with an AI overhaul, Amazon's record-breaking day, and another EV maker losing its charge. I'm Melissa Lee coming to you live from Studio B at the NASDAQ on the desk tonight. Tim Seymour, Karen Feinerman, Steve Grasso, and Guy Adami. And we start off with Morgan Stanley's legal mess. Shares of the investment bank sinking as much as 7 % today after a report that the SEC and other federal regulators are probing the company's wealth management unit over how it vets clients. Leslie Picker's got all the details. She joins us now on the Fast Line. Leslie.

1:03Hey, Melissa, yeah, that five and a quarter percent decline continuing a little bit in the after hour. And that was after you mentioned that Wall Street Journal report about a wider regulatory probe into the firm's wealth management division and how it is vetting clients at risk of money laundering. At issue, according to the journal sources who were anonymous in the pieces, basically whether Morgan Stanley has been, quote, sufficiently investigating the identities of prospective clients and where their wealth comes from, as well as how it monitors its clients' financial activity. Some of the probes are focused on the bank's international clients.

1:39And the journal reported in November that the Fed has been looking into similar issues. But today's story says there's involvement by other regulators as well, including the SEC and the Office of the Comptroller of the Currency, among other Treasury Department offices. And that's, again, according to those journal sources. I reached out to Morgan Stanley for comment. They declined to comment here, as did the OCC. But Morgan Stanley reports its first quarter earnings next Tuesday. Executive Chairman James Gorman has addressed this in the past. So we'll be definitely listening in extra closely next week to see if any of this is discussed.

2:18Melissa. In your view, Leslie, what has gotten worse since this was first disclosed? What I found interesting in the Wall Street Journal report was that there were actually lists of clients and that these lists were generated by separate agencies. And some of those clients on those separate lists actually overlap, which seemed to me like a real red flag that there is something about these same groups of clients that, you know, sounded the alarms off. And international, of course, a key focus here as well. What's interesting is it doesn't appear to be any kind of specific client or anything that sounded the alarms for regulators, that it was just a broader probe into kind of the processes and the way that they vet their clients.

3:02It also is notable they just filed their proxy, I want to say a week or two ago. This wasn't listed as one of the major legal issues that they have right now. So it appears to be kind of at this probe stage. But I think what sent the alarm bells ringing with this Wall Street Journal report is the idea that more regulatory agencies other than the Fed are looking into this. Therefore, it has expanded. So it's unclear exactly what at this time it will lead to. All right. Leslie, thank you. Leslie Picker joining us tonight on the Fast Line. Wealth management, of course, a unit that really differentiates Morgan Stanley.

3:41That's what a lot of investors like about Morgan Stanley. And here it is under scrutiny here. Karen, how do you think about how this could impact that business and the growth of that business? Yeah, so I own Morgan Stanley, so I'm not delighted by this. I mean, it has to weigh on it somewhat. Aside from just, you know, I don't know how you comply with these probes. That sort of takes a lot of work, takes a lot of focus. It's probably not great for morale. I don't know how you are in sort of a growth mode and trying to reinvigorate while you're doing that. So on the other hand, I'm not really sure how big of a deal, how much is this really worth to them?

4:18I don't really know. I sort of feel like if they have great earnings, I don't know that people will care they have great earnings because they got to clear up this first. If they have bad earnings, that's probably bad. So I'm not that optimistic in the near term that this turns around very quickly. I don't want to say this is a giant disaster at all. I think I have to read more about how did they in the 10K how did they describe this issue interesting that Because Leslie brought up it's not in the proxy, right? So and how did it get bigger now? There's sort of some juicy, you know One account is a Caribbean account or seems to be in the Caribbean but claims to be right elsewhere And it actually had a lot more money than the occupation of the person whose account that is was actually guys account was it?

5:03Okay, so we've narrowed that down, which is good All right. However, still, I think it will weigh on the stock in the short term. It's like it's been a fascinating couple of years for Morgan Stanley. It's been a fascinating five years, really, if you think about the business that they've taken, which was very reliant on M &A broker dealer dynamics, investment banking, for sure, into a business that's now more than 50 percent in asset management. That's smooth that the business it's added to the multiple. We're talking about the acquisition of Eaton Vance, certainly the E-Trade acquisition. Eaton Vance also has parametric.

5:33I mean, there's a lot of specialized asset management in here. It's been very impressive. But if you think about what the impact of this headline is, first of all, AML, money laundering rules and whatnot are no joke in the asset management business. And Morgan Stanley is not treating them as such. I'm not implying anything. What I'm saying is this is something that involves multiple regulatory bodies within the U.S. government, including the Treasury. So there are dynamics here that I think will take some time. Whether this impacts the stock, I mean, I have to say the stock's been kind of dead money for two years.

6:03And it's amazing how we do a Morgan Stanley Goldman Sachs comparison. And there was a two year period where Morgan Stanley outperformed Goldman by 25, 30 percent. And for the last, I would say, really since that that peak of the Morgan Stanley valuation in early 22, it's underperformed Goldman Sachs by 25 percent. Yeah. So I was going to touch on that. It has underperformed the whole entire group. And if you go back to January 16th, they paid hundreds of millions of dollars in regulatory fees. So is this a pattern? Is it the same thing? Is it a derivative of the same thing? Is it all KYC? Is it know your client?

6:36I don't know what the difference is, but for me, I would wait. Why would you want to rush in here? Why would you want to buy a stock that just had a collapse? It was, by the way, a bigger percentage collapse in January off of that January 16th headline, even though it was in it a little bit before. It was a bigger collapse back then, rallied back, had a good couple of months, and now we're dealing with the same type of thing. And once again, to Tim's point, this has underperformed the group by a large margin for quite some time. The visual goes a long way. So let's pretend this news didn't exist.

7:09And that's to Tim and Steve's point. I mean, where Goldman Sachs is making effectively an all-time high, and it's been sort of lower left upright for a while, Morgan Stanley has been flatlining since this time in 2022. It's basically been an$85 stock the entire time. It had a huge run prior from like$30 to, I think,$101. and won, and it sold off, and here we are. So that's on what's been an extraordinary tape and obviously a great environment for the Goldman Sachs and J.P. Morgans of the world. So it's underperformed. You throw this on top, and I guess what Steve just said, why rush in ahead of earnings at this point?

7:43There's no compelling reason, given the fact that you can hear from them next week and there's more to come with this to buy the stock unless you feel very confident that earnings are going to blow it out of the water and this is a non-story, and I'm confident we're not of those things. Banks pay fees all the time. They pay fines all the time for various charges. So how do we? Cost of doing business. Right. So is this part of it or is it or do you think about sort of the interim where maybe opening new accounts might slow because they have to be more careful about how they do that? They have to, you know, implement new processes, which may cost more money, more compliance staff, which costs more money.

8:21I mean, how do we think about the actual impact? Well, James Gorman pointed out that in January that they're spending more money as if, you know, there was a knowledge that this was something that they're dealing with on software and systems to really be more involved here. I think it, you know, again, I think it will impact in terms of processes. It has to. Having said that, I think this is going to be an overreaction. This isn't a reason to me not to buy the stock. The reason to not buy the stock is I think there may be some dynamics in the wealth management, asset management, overall trends that I think, look, it's been as good of a spot for that business for the last two years and the stocks underperformed.

8:59I don't love that. I also, you know, I was reading a report by Jeffries. They point out in terms of, you know, debt capital markets are actually kind of back. Equity capital markets are coming back. M &A's proxy, you know, essentially their M &A advisory fees put them in terms of market share. They've fallen. I think they're the lowest they've been in a long time. So the dynamics here, I think, for the other parts of the business aren't great. Those are the things I'm more worried about. These headlines are things to pay attention to, but this isn't the reason why I would not be owning the stock.

9:26All right. RBC's top bank analyst thinks Morgan Stanley's issue should be taken very seriously. Gerard Cassidy is the head of U.S. Bank Strategy. He's got a hold rating and a$91 price target on Morgan Stanley. Gerard, great to have you with us. You've been listening to our conversation. How do you think this actually impacts Morgan Stanley? Over the near term, Melissa, it is certainly going to weigh on the performance of the company. It's unfortunate that they're running into these problems because BSA, AML, as everyone's been talking about, are very serious. They will get to the bottom of these problems.

9:57They will solve these problems. But it will take time. It will take some money. And as I think Karen pointed out, it's going to distract a number of people in the organization from growing that business. And I think it was Guy that mentioned that, you know, this has been a real source of strength for the company in increasing its valuation over the last five years. And now it's unfortunately running into some issues. Hey, Gerard, it's Karen. Thanks for coming on. I'm a little confused about sort of the the drip dripping out of. All right. So there seemed to be a problem in January. Now it seems to be bigger.

10:35How do you think that happened? And I'd much rather, as a sad shareholder, see a giant settlement fine, whatever it is, and the end of the issue, as opposed to this kind of slow burn. No, I understand what you mean, Karen. And we saw it actually with New York Community Bank when you saw their problems in January. Totally different reasons. But what outsiders sometimes don't fully appreciate, as much as we think the regulators talk to one another for a coordinated effort, that's not always the case. And I think that may have been the situation here. We don't know for sure. But it wouldn't surprise me that, you know, the regulators all do they're all in their own silos and they are very protective of their turf and they go about it their own way.

11:21And that therefore that that January announcement may have brought the other regulators on other regulators on board to take a look as well. Let's downshift, Gerard, if we may, since you're here and you're on the Mount St. What is that? Mount Rushmore of the bank analyst. Bank of America is your top pick in the space, I believe. So the question I have is, does that mean by definition you have to think rates are going down? Because when tenure yields were 5 percent and their hold to maturity losses were$114 billion, this was a$25 stock. It's not coincidence that it rallied as rates went down. What are your thoughts in terms of BAC and interest rates?

12:01It's a really good question, Guy, because when you think about Bank America, one of the great strengths of this company, It's true for some of the others like J.P. Morgan and regional banks like Fifth Third and M &T Bancorp. It's the core consumer deposits. That's the critical story for a bank. And as we all know, following the financial crisis, when you had rates at 0 to 25 basis points, core consumer deposits were not that valuable. Now, with rates at over 5%, they're extremely valuable. And so the Bank of America long-term story is about that phenomenal deposit base they have. But to your point on the held-to-maturity losses, when you take a look at that, the stock obviously was lower.

12:46And that was when everybody was very fearful of what that meant for maybe capital. But now people realize that the held-to-maturity losses will weigh on their margin. But over time, they're burning off. So we're six to nine months further into it. So it's not as much of an issue. But I think we're going to hear about the AOCI. That's the marks that they take through capital on the calls this week because those numbers have grown for everybody. Gerard, great to see you. Thank you for your analysis. Gerard Cassidy. Welcome. So, of course, we're just at the precipice of all these bank earnings coming out.

13:21What are you most worried about here? Well, we've been dealing with the inverted yield curve for quite some time. The banks have done just fine on it. I think new loan generation is what you want to see. And with interest rates so high, that's going to be a headwind for the banks. That's something different. We haven't seen that, and it's getting longer in the tooth. J.P. Morgan has outperformed everybody by a pretty decent margin. So I don't want to make it really complicated. I just stick with J.P. Morgan. And so Karen likes to hear that. But what do you think about Bank of America in terms of Gerard's explanation?

13:52I think it's an interesting one in that some of that portfolio has worked off for this many months into it. But if rates go back or if they stay at four and a half or go north of four and a half, what happens? Well, this is sort of foregone margin that they can't earn because they have so much money out for their duration that it's in the hold to maturity. And what he was talking about, AOC, is a mark to market, which can be variable. Some people look through it. I just want to hear what they think of the economy and how the consumer is doing. And, you know, Jamie didn't seem that optimistic on his letter, but that's sort of his way.

14:28He's always, you know, a lot to be afraid of. I think it's going to be good earnings. There's a lot of good things going on in multiple parts of the business. I think net interest income is really important for these banks, and that's only gotten better. All right, let's turn now to Apple, which saw a huge pop in today's session. Shares jumping after the reports that the tech titan plans to overhaul its entire Mac line with AI-focused chips. Apple hoping to boost sluggish computer sales with the new processor update. The stock's 4 % 4-plus percent rise, its best gain since last May. Wow. It got a little AI love today finally, Guy.

15:02Too bad Dan's not here because I'm sure he'd wax poetic. But, yeah, and it traded 90 million shares, which is a good sign. It didn't do this on light volume, which is encouraging. Now, the fact that it keeps pushing down to that moving average, seemingly holding it, is encouraging. But is this going to basically cure all the ills that we've talked about now for a while? For one day, it has. The same way, by the way, it did, I think, two and a half or three weeks ago, where you had that sort of one, one and a half day blip before it headed south again. So let's see tomorrow and over the next couple of days.

15:31The timing of this is interesting because they just had a computer refresh in October. So this would be a very quick refresh in terms of its new Macs and, you know, laptops, et cetera. The timing is also ahead of the WWC. So, you know, you could have a one-two punch here of AI excitement for Apple. Yeah, and I think as a couple of the brokers have put out in the reports, I mean, the time is right for this. So a stock that's been looking for a catalyst, a stock that has a date where often there is a catalyst and a dynamic here. Apple hasn't been sitting around in the air world doing zero. I mean, there's no question.

16:05And we've talked all about how that installed base is so powerful in terms of when they really decide to make it an impact on those phones themselves. So the fact that we're getting some MacBook dynamics and we have this event coming up, I think it probably eases higher. All right. Coming up, retail rates and a furry panda. Oh, a short seller with a funny name is sinking an insurance stock. A check-in on Capri and Tapestry's potential deal and what Karen is seeing in the charts and where the 10-year could be heading after this week's inflation data. All that ahead. And later, Amazon's all-time high.

16:37The e-commerce giant jumping to records in today's session with CEO Andy Jassy is seeing from consumers. And if that stock is primed to keep popping, don't go anywhere. Fast Money is back in tune. This is Fast Money with Melissa Lee right here on CNBC.

17:00Welcome back to Fast Money. Shares of Globe Life, an insurance firm in the S &P 500, making a comeback in the after hours after responding to a short seller's report. Fuzzy Panda Research is the name of the company that accused Globe Life subsidiary American Income Life of insurance fraud. That division accounts for about half of Globe Life's total underwriting margins. Shares were down more than 53 percent during the regular session. CNBC's Contessa Brewer is here with the very latest on this. Contessa. And in fact, at one point, Melissa, shares of Globe Life were actually paused. The trading was paused because of the volatility and they fell to their lowest level in more than 10 years on that report from Fuzzy Panda Research disclosing the short position.

17:41So Fuzzy Panda says, look, there are multiple instances of insurance fraud that they claim were ignored by the management over the past two years. Here's the response that we got from the company today. They say we are disappointed to see that self-motivated short sellers push inflammatory allegations in order to drive down Globe Life stock price. We reviewed the report and found it to be wildly misleading, mixing anonymous allegations with recycled points pushed by the plaintiff's law firms to coerce Globe Life into settlements. The motivations are driven solely by short term profits. And they go on to say that they take these allegations seriously.

18:17They don't stand for any of those misdeeds. Meanwhile, we know that the Department of Justice opened a probe that was disclosed in an 8K in March by the company. And Globe Life says it's been cooperating with the U.S. Attorney's Office in response to subpoenas that were issued. By the way, we believe that Globe Life and its subsidiary companies have more life insurance policies, more policy holders than any other life insurance company in the country. And they really target their business toward lower and middle income customers that have an average life insurance policy of, say,$30 ,000 to$40 ,000.

18:53So it's a totally different demographic than some of their bigger competitors. An analyst that I spoke with say this company has a solid track record. It has a solid management team, predictable and stable results compared to some of their probes. But we will to some of their peers, rather. But we're going to wait and see how the DOJ probe plays out. And, of course, what the short sellers report, the impact that has on the stock right now. Melissa, I'll send it back to you. Contessa, I'm just curious, when you speak to these analysts and they say that they have very stable earnings, I mean, are they almost too stable?

19:26You know, oddly stable. I mean, is there any sort of shock about this report? What they. Yes. The analysts that I spoke with say because of the the quality of the management that's been in place, people that have been operating in the life insurance business for years and years, there was some shock about the disclosure of the investigation and the lawsuits that have been filed. But on the other hand, they employ, I was told, somewhere in the neighborhood of 10 ,000 independent agents. And so there has been some sort of like shrug, like if you have 10 ,000 independent agents, could there be misdeeds?

20:01Absolutely. But again, I go back to what the company says. They say that they are operating in accordance with the highest level of ethics and integrity and that they don't tolerate the kind of behavior that is alleged in the lawsuit, in the DOJ probe, and now by the short seller's report. All right. Contessa, thank you. Contessa Brewer with the very latest on this story. It is up 9 percent in the after hours, but far from recouping the losses that it suffered in today's session. It's worth noting, too, that just last week at the Sohn conference, Globe Life was a company that was highlighted by Orso Partners in a negative way.

20:37So it's not the first time that there have been some allegations. And as Contessa had mentioned, the DOJ also opened up its investigation just in the beginning of March. All fair. 56 percent or whatever it was is. That's interesting. Now, Fuzzy Panda, that's the first time we've used that. Anonymous short seller. Fair enough. They should bring forth, though. They said we have found extensive allegations. I mean, those should come to light at some point. Right. I would think. Number two, if you don't believe it, if you think it's Fugazi, you have reason to believe in this company. They report next week.

21:08They should actually probably, I would think if they could come out. Karen can probably speak to this report tomorrow and discuss this. With all that said, I mean, this stock traded 36 times normal volume today. So if you're into sort of the casino model, it might be an interesting shot on the long side just on the back of that. I think you bring up an excellent point. If you are there, I mean, this is a crisis, right? And you're in the business of anything that's a financial product in any way. You want your customers to think of you as a good institution, right? So if they they must have some sense, the quarter ended.

21:41If they really should address this, if they could. I mean, it is I get why they're right. The fuzzy panda. We don't know who fuzzy panda is. The anonymity of it is, you know, you've got to think about that. But as to how to trade, I have no idea. It just seems so, this is crazy. So I wouldn't be long or short, but I totally agree with you on how they should handle it if they can. I mean, we're not talking about a micro cap or small cap company being pushed around. I mean, this is a huge company, listen to the S &P 500, that just got whacked in today's session. This brought it back to levels. I don't know if guys said it back to February 16th, basically 2016, 2016 levels.

22:22So this was a I'm not advocating someone to run in and try to buy it off this dip. But when you're looking at something like this, they're already buying in the after hours. We show the charts up over eight percent. I think the way to take this is if you want to take a step on very small amounts and know nothing, you're just you're just at the casino. You know, but if you know the other companies that were dragged down by it, all the other names that you don't think are going to have the same problem, maybe you want to buy those on a dip. Regarding the quiet period or earnings or should they come out?

22:54Piper has a note out saying that this creates essentially an information vacuum. And investors have nothing to go with. And could they come in front of that? I don't know. It also points out that there is more headline risk when you're selling products to retail folks, and others as opposed to institutional. And this is the kind of business that this company's been in. And again, maybe they've been too good. By the way, I mean, aren't pandas already fuzzy? So, I mean, wouldn't that be furry or fuzzy? That's a fair point, but maybe it's just a descriptor. I mean, you say yellow duck, you know, or some other.