Morgan Stanley: What Did CIC Know, and When Did They Know It?

Tinbox, in the comments to my last Morgan Stanley post, makes a very good point: that China Investment Corp must have been given lots of material non-public information in advance of Morgan Stanley's Q4 earnings announcement.

I don't know how long it takes the Chinese to do due diligence on a bank the size of Morgan Stanley, but if it's more than four trading days, we have a prima facie problem here. That's because under SEC regulations, such information must be released on a "rapid and current basis," which the courts take to mean four days.

Of course it is conceivable that this deal got done in the space of four days. Keith Bradsher says that it's "an abrupt shift in strategy for the $200 billion fund," whose chairman said as recently as November 29 that he "would mainly invest in financial instruments like index products". Bradsher also describes the decision to invest as "sudden". But given the complexities of Morgan Stanley's balance sheet - Paul Murphy notes today that its "unallocated economic capital was a negative $4.1 billion" at the end of the latest quarter - it would surely take either enormous guts or an incredible amount of financial sophistication to make a $5 billion investment decision essentially over the course of a long weekend, especially when that decision involved buying in very close to a market price which did not reflect the write-down news.

But given the timing of Zoe Cruz's defenestration at the end of November, one has to suspect that Morgan Stanley has been sitting on the news of these losses for much more than four days - and that CIC has, as well.

Incidentally, since I've ventured far into the land of rampant speculation already, here's another thought: could the Morgan Stanley bid this morning be coming from the same people who have been buying in to the Chinese stock-market bubble? Given that the Chinese government now owns 10% of Morgan Stanley, some investors might assume that the bank has an inside track in that country - something which could prove to be very valuable indeed, over the long term.

Update: Just to be clear, here, I'm not accusing CIC of doing anything wrong at all. I'm worried about what Morgan Stanley did. If Morgan Stanley had material non-public information about its losses and didn't divulge it to shareholders in a timely manner, that would violate SEC regulations.