Morgan Stanley Reports $9.4B Writedown

Morgan Stanley building, Times Square, New York, photo on black, 2005
AP (file)
Morgan Stanley, the No. 2 U.S. investment bank, reported a $9.4 billion writedown on Wednesday from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government.

The writedown, nearly triple what Morgan Stanley warned of in November, pushed the investment house to the first quarterly loss in its 73-year history. Chairman and Chief Executive John Mack accepted blame for the fiscal fourth-quarter loss, and said he would forgo his annual bonus.

Morgan Stanley becomes the latest on Wall Street to be punished by the unfolding credit crisis - and to be forced to reach out to a foreign government to secure a major investment to shore up its books. Major global banks have lost $100 billion in the past six months alone.

"The writedown Morgan Stanley took this quarter is deeply disappointing - to me, to our colleagues, to our board and to our shareholders," Mack said. "Ultimately, accountability for our results rests with me."

Mack aggressive expanded Morgan Stanley in the past year into the home loan industry, and trading in securities that support them. That strategy backfired, and Mack pinned the disappointing results on "isolated losses by a small trading team in part of the firm."

Similarly large writedowns have already caused the ouster of Merrill Lynch & Co. CEO Stan O'Neal and Citigroup Inc. CEO Charles Prince. Last month, Morgan Stanley pushed out co-President Zoe Cruz in a broader shakeup of its top ranks.

It also caused a number of global banks to seek capital from sovereign wealth funds, such as China Investment Corp.'s investment in Morgan Stanley. China's government-controlled investment vehicle will hold no more than 9.9 percent of the investment bank once its investment converts to common shares in 2010.

Morgan Stanley said it lost $3.61 billion, or $3.61 per share in the fourth quarter, compared to a profit of $2.27 billion, or $1.44 per share, a year earlier. The investment house reported negative net revenue of $450 million because of the writedowns, compared to revenue of $7.75 billion a year ago.

Results broadly missed Wall Street projections for a loss of 39 cents per share on revenue of $4.23 billion, according to analysts polled by Thomson Financial.

Morgan Stanley said it had about $1.8 billion worth of subprime mortgage exposure left on its books at the end of the quarter on Nov. 30, down from $10.4 billion at Aug. 31.

For the full year, Morgan Stanley's profit plunged 62 percent to $3.44 billion from $9.10 billion in 2006. Revenue fell 6 percent to $28.03 billion from $29.84 billion in 2006.

Despite the steep declines in the fourth quarter and full year, investors were encouraged by the latest capital injection into the financial industry. The equity units the Chinese fund purchased from Morgan Stanley will yield 9 percent per year before they are converted into common shares. The fund will have no special rights of ownership or any role in management of Morgan Stanley.

In October, Bear Stearns Cos. agreed to a $1 billion cross-investment from China's government-controlled Citic Securities Co., while Citigroup Inc. received a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government last month.

Shares of Morgan Stanley fell about 18 percent during the bank's fiscal fourth quarter, which stretched from Sept. 1 through Nov. 30. In electronic trading Wednesday, the shares fell 9 cents.