More woes for Morgan Stanley

Wall Street firm, suffering first quarterly loss ever, takes $5.7 billion writedown and sells $5 billion stake to China fund. CEO forsakes bonus.

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By David Ellis, staff writer

Morgan Stanley made headlines Wednesday, suffering a quarterly loss, while the company also took nearly $6 billion in additional writedowns.
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NEW YORK ( -- Morgan Stanley stunned Wall Street Wednesday by taking an additional $5.7 billion mortgage-related writedown, while announcing a $5 billion cash injection from a Chinese state-run investment fund.

The firm said it lost $3.59 billion, or $3.61 a share, during the fourth quarter - the first quarterly loss in Morgan Stanley's 72-year history. A year ago, Morgan Stanley posted a profit of $2.27 billion or $1.44 a share.

The loss was steeper than expected, as analysts polled by Thomson Financial were anticipating a loss of 39 cents a share.

John Mack, Morgan's chairman and chief executive, labeled the firm's results "embarrassing."

Adding to those woes was the company's decision to take an additional $5.7 billion writedown on mortgage-related securities during the quarter - which ended Nov. 30 - on top of a previously announced $3.7 billion hit.

The company blamed the writedown on bad bets by a single trading team in the company's fixed-income division. The miscalculations were exacerbated by deterioration in the credit markets and a lack of liquidity for subprime and other mortgage-related securities.

Analysts like Punk, Ziegel & Co.'s Richard Bove said the news was a sign of a "complete breakdown" in the company's risk management.

"Like the little old lady from Dubuque who closes her eyes and hopes that the bad stuff will go away, Morgan Stanley did the same," Bove wrote in a research note published Wednesday.

Morgan Stanley becomes the latest Wall Street firm to deliver disappointing results. Goldman Sachs (GS, Fortune 500) reported higher earnings Tuesday but showed signs of strain in some of its key businesses.

Last week, Lehman Brothers (LEH, Fortune 500) saw a decline in its quarterly profits, and Bear Stearns (BSC, Fortune 500) is expected to post a loss when it reports before Thursday's opening bell.

Given the losses, Morgan Stanley said it would cut back its mortgage business and take fewer investment risks as it tries to figure out where it went wrong.

"We are going to dial back a bit," Mack told analysts Wednesday.

Mack, accepting some of the blame for the firm's dismal results, added that he would not receive a bonus for 2007.

"Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I've told our compensation committee that I will not accept a bonus for 2007," Mack said in a statement.

Last year, he collected one the biggest bonuses among Wall Street CEOs, raking in more than $40 million in stock and options.

Across Morgan Stanley's different businesses, hardest hit was the company's institutional securities division, which was the source of the fourth-quarter writedowns.

Other divisions fared markedly better. Morgan Stanley's global wealth management and its asset management units experienced double-digit increases in net revenue from a year ago.

Wall Street seemed little shaken by the news. Morgan Stanley (MS, Fortune 500) shares gained more than 4 percent in late afternoon trade on the New York Stock Exchange.

Jeff Harte, who covers Morgan Stanley and other financial services firms for Sandler O'Neill & Partners, said investors may believe that this quarter's results represent the worst of Morgan Stanley's woes, or were comforted by the company's decision to raise $5 billion in capital from China's state investment fund.

As part of its earnings announcement, Morgan Stanley said it would sell a $5 billion stake in the firm to the sovereign wealth fund China Investment Corporation, which will be worth 9.9 percent or less of Morgan Stanley's total shares outstanding.

"They needed the capital given the losses," said Harte.

Morgan Stanley said stake sale allows the firm to raise capital and improve its ties to the world's fastest growing economy.

The company said the China fund will be a passive investor and will have no management role in the firm and will not have a say in naming a member to the company's board of directors.

Rival Citigroup (C, Fortune 500) announced a similar move last month, selling a $7.5 billion stake to the Abu Dhabi Investment Authority in an attempt to raise capital. To top of page

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