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I am not going to focus on Asia or Europe this morning. We have our own mess to deal with. Why is it that the US hedge fund community loves to buy everything in life on sale, other than stocks? Why is it that the CEO of Morgan Stanley, John Mack, is pointing fingers at the US hedge fund community for the weakness in his stock price?

Since I have partnered with some of Morgan Stanley’s top horses, I know a thing or two about their business. One of those things is that Prime Brokerage is one of the most important drivers of their profit growth. For those of you who are unfamiliar with what holding a prime brokerage account means to a hedge fund, quite simply, it’s where you keep your money, short balances, etc.

When my Partner and I started our own hedge fund in 2005, I used Morgan Stanley as my Prime Broker. Why? Well, I felt (and still feel) that they are the best on the Street in this business. There are two fine gentlemen who currently work for John Mack who I will refer to as Fitzpatrick and Reilly (their last names) who are two of the most intelligent and upstanding men I have ever had the pleasure of working with in this business. They understand that this is a client business. They understand the meaning of a handshake. They, unlike Dick Fuld, who calls it a “franchise business”, are the guys rolling their sleeves up every day, who understand that this is a people business.

John Mack has done the best job out of the bulge bracket investment bankers in keeping his antiquated ship from sinking, but yesterday he threw his clients and credibility into the water. He sent a letter to his employees that I have sitting here on my desk (no, neither Fitz or Reilly sent it to me). He wrote “there is no rational basis for the movement in our stock… we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down…”. C’mon John – now I am confusing you with the politician, Johnny Mack. I didn’t get the memo in October of 2007 that the market was being driven by “rumors and greed.” That was 26% higher in the S&P 500, but hey, the leadership on Wall Street hasn’t paid much of a premium for economic historians as of late, so I digress…

Mack proceeded to call up his boys at Goldman’s, Lloyd Blankfein and Hank Paulson, to go after their now evil prime brokerage clients. All he needed was George Bush on the call saying “we’re gonna smokem out of their holes”! Oh, my bad, Paulson is the head of the US Treasury now… and right, right… those “holes” are client accounts held at Morgan Stanley and Goldman Sachs!

Somehow I had another up day in the Portfolio yesterday – I was being an “evil doer” being short Goldman Sachs, I guess. If I haven’t made my point yet on why I’ve been short GS, I’ll say it again – the current structure of a fully integrated global “investment bank” is being revealed as conflicted, compromised, and constrained. You cannot run these businesses together anymore. It’s impossible to always be putting the client first, across the “franchise” platform. This forces executives to take on monstrous leverage and risk.

Fitzpatrick runs a heck of a prime brokerage business. Reilly is as good as they get on the institutional brokerage side of the house. These guys put the client first, not the “franchise”. The franchise issues you more disclosures and disclaimers than they do actionable real time advice. The franchise is willing to let their employees’ life savings go to zero or sell it to the lowest bidder. Why? Because their principal, prop trading, and banking businesses have conflicting agendas with your account. C’mon John, this is why your stock is going down. This is why you’re announcing that you need to talk to Wachovia about a merger.

Others will say that your firm is levered 28x to your shareholder’s equity, and that you need Wachovia’s backstop of cash deposits (liquidity). If that isn’t partly true John, why are you talking to them? If none of it is true, why didn’t you tell your employees that you, as in you yourself, bought stock in Morgan Stanley yesterday? You’re an upstanding man of the highest reputation. The Street loves you. Fitzpatrick and Reilly have families and commitments. Stand up and tell it like it is. Pointing fingers at your clients is going to be very difficult for these two fine gentlemen to explain on the phones this morning.

On massive volume and volatility yesterday, I moved from 84% to 76% cash. It’s time to take some ownership out there in the USA. US market game time is in t-minus 2 hours. Let’s get ready to win out there. Buy low, sell high. Let everyone else worry about why they bought high and why they are now selling you their stock and excuses, low.

Best of luck today,
KM