Morgan Stanley tries to restore 'sanity' to market

Reporting its results a day early, the investment bank handily beats earnings forecasts but the stock still fell after hours.

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By David Ellis, staff writer

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NEW YORK ( -- Morgan Stanley offered up some much-needed good news late Tuesday, reporting better-than-expected quarterly results a day in advance.

The nation's No. 2 investment bank posted a net profit of $1.43 billion, or $1.32 per share, during the third quarter ending in August, down almost 8% from a year ago.

The numbers, however, were much better than forecasted - analysts were anticipating a profit of just $869 million, or 77 cents a share, according to Thomson Reuters.

The company also reported sales of $8 billion in the quarter, a slight increase from the same period last year, but much higher than the $6.3 billion in revenue that Wall Street was expecting.

Morgan Stanley (MS, Fortune 500) shares, which finished 11% lower in regular trading Tuesday, fell another 3% after-hours.

Colm Kelleher, Morgan Stanley's chief financial officer, said the firm felt compelled to report a day early given some of the developments and rumors that have swirled around the financial services industry in recent days.

The New York City-based firm was originally scheduled to report its results before Wednesday's market open.

"It is very important to get some sanity back into the market," Kelleher said in a conference call with analysts.

Just a day earlier, fellow investment bank Lehman Brothers (LEH, Fortune 500) filed for bankruptcy Monday, marking the biggest ever in U.S. corporate history.

Merrill Lynch (MER, Fortune 500), a Wall Street icon itself, announced plans to be acquired for some $50 billion by Bank of America (BAC, Fortune 500), after enduring billions of dollars in losses as a result of ambitious bets on the U.S. mortgage market.

There have also been increasing fears about the health of the insurance giant American International Group (AIG, Fortune 500), which is scrambling to raise much needed cash.

Stocks finished higher in what turned out to another dramatic day on Wall Street, even though the Federal Reserve decided to keep its key short-term rate steady Tuesday afternoon. The market had been expecting a rate cut in light of the credit crisis facing the financial sector.

A closer look at the numbers

John Mack, Morgan Stanley's chairman and CEO, attributed Tuesday's results to strong performances across a number of the company's key divisions, including its commodities and foreign exchange businesses.

Just a quarter ago, the company saw its second-quarter profits plunge 57% due to lower investment banking and sales and trading activity.

The company's institutional securities division, which comprises the bulk of its business, managed to minimize the pain this quarter in those businesses as sales rose 19% to $5.9 billion.

Revenues in Morgan Stanley's other two core businesses - global wealth management and asset management - were down from a year ago.

The past three months have been difficult for securities firms. In addition to exposure to toxic mortgage-related assets, they have had to endure wild swings in the equity markets and a virtual halt in investment banking activity.

Goldman Sachs (GS, Fortune 500) confirmed that Tuesday morning when it reported its third-quarter results. The leading investment bank's profits fell 70% from a year ago -- but still managed to beat expectations.

Kelleher offered a tempered outlook of the company's prospects, saying that the remainder of the year will remain challenging.

He also defended the firm's investment bank structure, saying that the company did not plan to buy or merge with a commercial bank. Goldman Sachs' CFO made similar comments earlier Tuesday.

"We believe in the diverse business model of the investment bank and its ability to adapt to different environments," said Kelleher. "Depository institutions do not better enable us to execute our business and may bring with them their own set of complications."  To top of page

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