By Joseph A. Giannone
NEW YORK (Reuters) - Morgan Stanley reported a wider-than-expected $2.2 billion quarterly loss on Wednesday as plummeting markets and trading moves generated more writedowns, while investment banking and brokerage fees sank.
It was the bank's second loss in the last five quarters, driven by $1.7 billion in writedowns of corporate loans, $800 million in writedowns of securities held in bank units as well as $1.8 billion in principal investment losses.
Morgan Stanley also took charges on the impaired value of two deals: $725 million related to subprime mortgage company Saxon Capital, bought in December 2006, and $243 million related to Crescent Real Estate, purchased in August 2007.
Yet, investors rallied behind Morgan Stanley, sending shares up 10 percent to their highest level in nearly two months.
"Maybe the message is these guys are going to survive, and if a company is going to survive, their stocks should at least be at book," said Sanford C. Bernstein analyst Brad Hintz, referring to the current book value of $30.24.
Initially, Morgan Stanley's shares fell on the disappointing quarterly results, reflecting how badly the investment banking business was hurt by a market slump that took a turn for the worst in November.
"Everyone knew this quarter was going to be awful," said Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis. "There's just nothing going on in the business."
The disappointing results would have been even worse but for one-time gains: $2.1 billion from debt repurchases and a $2 billion gain from the falling value of Morgan's own bonds.
Credit rating agency Moody's Investors Service cut Morgan Stanley's senior debt rating by a notch to "A2," citing the quarterly results and the bank's exposure to credit markets.
The stock rose $1.66 to $17.79 on the New York Stock Exchange on Wednesday.
Morgan shares advanced 18 percent on Tuesday, boosted by a Federal Reserve interest rate cut and results from Goldman Sachs Group Inc that were not as bad as Wall Street had feared.
UNPRECEDENTED
New York-based Morgan Stanley said it lost $2.20 billion, or $2.24 a share, in the fiscal fourth quarter ended November 30. Analysts' average target was for a loss of just 33 cents a share, according to Reuters Estimates.
From underwriting to trading, revenue fell off a cliff as stock and fixed-income markets went from bad to worse.
"Nobody expected November to be as bad as it was," Morgan Stanley Chief Financial Officer Colm Kelleher said in an interview, noting that results reflected deep losses on assets hammered by what he called "irrational pricing."
Institutional securities, its trading and banking division, posted a $2.1 billion loss that included $1.2 billion in mortgage related losses. Other sales and trading losses reached $1.1 billion. This despite concerted efforts by the bank to tighten risk management after a disastrous $9.4 billion in mortgage losses in the year-earlier period.
Investments in real estate and other principal investments, meanwhile, generated $1.8 billion in losses.
Kelleher told Reuters that some of the damage reflected trading positions that were "caught offsides" by unprecedented turbulence during the quarter. "It was an incredibly stressed environment," he said.
Morgan Stanley continues to suffer from moves three years ago designed to emulate rivals like Goldman and Lehman Brothers Holdings Inc by taking on more trading risk, betting more capital on investments and leveraged buyouts, and building a vertically integrated mortgage business.
The wealth management operation reported a $55 million pretax loss, reflecting lower revenue and writedowns of auction-rate securities -- nearly impossible to sell this year -- that it was forced by regulators to purchase from customers.
The asset management unit also continued to struggle, posting a $1.22 billion pretax loss. Core revenue plunged amid investment losses.
Morgan Stanley's merchant banking business posted negative revenue of $454 million, fueled by real estate and private equity investment losses.
The bank has worked aggressively to strengthen its balance sheet, shed risky assets and reduce risk, but markets weakened at an even faster clip. Bear Stearns was forced into the arms of JPMorgan Chase & Co in March, and Lehman collapsed into bankruptcy in September.
Morgan Stanley got a shot in the arm in October with a $9 billion investment from Mitsubishi UFJ Financial Group Inc, followed by a $10 billion infusion from the U.S. Treasury.
Prior to Tuesday's gain, its shares had lost three-quarters of their value this year.
In part, the decline reflected questions about the ability of Wall Street firms to thrive in the new, deleveraged world. Morgan Stanley has said it is scaling back proprietary trading and principal investments while slashing its use of leverage -- all of which may limit its profits in the future.
"They need growth and leverage on that growth to work, and right now they don't have that," said Fifth Third's Fisher.
In September, Morgan Stanley converted to a bank holding company after investors lost confidence in the broker-dealer model. It said it seeks $2 billion in cost savings that includes previously announced job cuts.
(Additional reporting by Leah Schnurr, Elinor Comlay and Juan Lagorio; Editing by John Wallace and Jeffrey Benkoe)
