By Joseph A. Giannone
NEW YORK (Reuters) - Morgan Stanley reported a much wider-than-expected $2.2 billion quarterly loss on Wednesday on plummeting markets and poor trading moves, while banking and brokerage fees sank.
It was the bank's second loss in the last five quarters, and six times deeper than expected, driven by a laundry list of setbacks: $1.7 billion in writedowns of leveraged buyout loans, $800 million in writedowns of assets held in bank units and $1.8 billion in principal investment losses.
Morgan Stanley also suffered charges on the impaired value of two acquisitions: $725 million related to Saxon Capital, a subprime mortgage company bought in December 2006; and $243 million related to Crescent Real Estate, purchased in August 2007 as credit markets shut down.
Still, shares rose as much as 11.2 percent on hopes that the worst of the losses may be over. Before the rally, Morgan Stanley traded for about one-half of its book value, or $30.24 a share at the end of November.
"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,
Early in the session, Morgan stock fell as the results showed how badly investment banks could get hurt by a market slump that became a rout in November. Merger and underwriting activity came to a screeching halt, with break-ups outpacing deals.
"Everyone knew this quarter was going to be awful," Fifth Third Asset Management portfolio manager Jon Fisher said. "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. Hintz said the results were of "poor quality" and complained that the company's conference call left too many questions unanswered.
Moody's Investors Service cut Morgan Stanley's senior debt rating by a notch to "A2," citing the results and the bank's exposure to credit markets.
The stock closed up 37 cents to $16.50 on the New York Stock Exchange, where they climbed as high as $17.93. On Tuesday, they climbed 18 percent as the Federal Reserve cut interest rates and Goldman Sachs Group Inc posted a loss that fell short of the market's worst fears.
IRRATIONAL PRICING
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 on average had forecast 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."
Kelleher said 2009 would be profitable, but "a year of transition" for many businesses as the company adjusts to life as a more conservative bank holding company. He assured investors the bank reduced exposure to risky assets, boosted capital and intends to fix the asset management business.
The trading and investment banking division posted a $2.1 billion loss that included $1.2 billion in mortgage losses, despite moves to tighten risk management in the wake of $9.4 billion in mortgage losses last year.
Real estate and other principal investments, meanwhile, generated $1.8 billion in losses. Prime brokerage, long a profit engine, was gutted during the quarter as clients balances plunged 65 percent at the end of November.
Kelleher told Reuters some the damage reflected trading positions "caught offsides" by the unprecedented turbulence. "It was an incredibly stressed environment," he said.
STOCK TARGET RAISED
Analyst Richard Bove of Ladenburg Thalmann increased his stock price target to $18, contending the biggest losses may be behind the bank or at least not repeated.
"It is assumed that in the next few quarters, there will be fewer markdowns, operations will improve moderately and the asset management business will turn profitable," Bove said. "It would appear that the company's earnings will improve due primarily to the elimination of losses."
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 -- impossible to sell this year -- that it was forced by regulators to repurchase from clients.
The asset management unit continued to struggle, posting a $1.22 billion pretax loss, fueled by investment losses and a 33 percent decline in assets under management. Customers pulled $77 billion from Morgan's funds during the quarter.
Morgan Stanley's merchant bank posted negative revenue of $454 million, fueled by real estate and private equity losses.
The bank has worked to strengthen its balance sheet -- it shed $542 billion of assets since the credit crunch took hold last summer -- yet markets weakened at an even faster clip.
Bear Stearns was forced into the arms of JPMorgan Chase & Co in March, and Lehman went bankrupt 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 $10 billion from the U.S. Treasury.
Through Tuesday, its shares lost three-quarters of their value this year. The decline reflected questions whether Wall Street firms could thrive in a world with low leverage.
In September, Morgan Stanley converted to a bank holding company after investors lost confidence in the broker-dealer model. Morgan Stanley has said it is scaling back proprietary trading, principal investments, prime brokerage and slashing leverage -- all of which may limit profits in the future.
"This is a company that has announced what could best be described as a full-scale retreat from many of the businesses they were in," said Hintz, a former Morgan Stanley CFO.
Kelleher told Reuters the bank wants to expand its retail banking business and contends it has the financial firepower to do deals.
(Additional reporting by Leah Schnurr, Elinor Comlay and Juan Lagorio; Editing by John Wallace and Jeffrey Benkoe)
