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Morgan Stanley (MS)
Morgan Stanley takes first-ever quarterly loss in stride
Financial services powerhouse Morgan Stanley announced Wednesday a nearly $10 billion writedown on mortgage-related assets due to the recent credit crunch subprime-mortgage fiasco. The colossal writedown (which was triple what investors were told to expect in November) led to the investment bank's first-ever quarterly loss in the 73 years since its founding. This might lead one to expect doom and gloom for Morgan Stanley shareholders, but shares were perversely up in morning trading on the news that the Chinese government plans to inject $5 billion into the investment bank's portfolio, making it the third in recent memory to receive foreign funds after disappointing writedowns. But with no end to the brutal credit crunch in sight, will it be enough?
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Obviously, Morgan Stanley executives have entered damage-control mode, balancing remorse with fervent optimism. CEO John Mack said that the $10 billion writedowns were "deeply disappointing" in what might be the financial understatement of the year. Mack then announced that he will not be taking a bonus for 2007, a far cry from his record-setting $40 million bonus in 2006. Additionally, the company noted that it is reorganizing the mortgage-related side of its business, including management, which may be a nod to the Nov. 29 ousting of co-president Zoe Cruz.
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Mack was lucky to have one bright spot in the agreement with China Investment Corp., which will infuse $5 billion. The Chinese government-controlled investment will hold slightly less than 10% of Morgan Stanley once its equity units convert to common shares in 2010. The news follows similar announcements from competitor banks Citigroup (C: Charts, News, Offers) and UBS (UBS: Charts, News, Offers), which each received liquidity injections from Abu Dhabi and Singapore, respectively.
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The agreement with China temporarily shot shares up over 5%, at one point reaching $50.99 in morning trading before leveling off. For the quarter ending Nov. 30 Morgan Stanley lost $3.61 per share, whereas the pre-mortgage-meltdown year-ago quarter saw profits of $1.87 per share. Financial analysts had been expecting a loss of only 39 cents per share this quarter, but Morgan Stanley nevertheless finished the 2007 fiscal year with $3.22 billion in profit.
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Despite the happy news from China, Wachovia analysts have cautioned that Morgan Stanley's writedown woes may mean that retaining employees and clients will be problematic in 2008. However, Morgan Stanley certainly wasn't the only investment bank exposed to the subprime meltdown, so it is quite probable that any such problems will be industry-wide.
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