Morgan Stanley is essentially tying its promise to provide financing to hedge fund clients to the prices of credit insurance on its own debt. If the cost of the protection rises to a certain level, that would trigger a reduction in Morgan Stanley commitments to hedge funds. Goldman Sachs is understood to have a similar arrangement that uses its bond prices as a reference point for credit commitments to hedge fund clients...
Morgan Stanley's use of the credit insurance market as a basis for lending decisions underscores the extent to which the derivatives market has replaced rating agencies as the final word on creditworthiness. It could lead to more scrutiny of the reliability of the credit insurance market.
It would also prevent some of the ridiculous prices on swaps that sometimes exist!