NEW YORK: Morgan Stanley posted its first quarterly loss ever Wednesday after taking an additional $5.7 billion write-down related to subprime mortgages. The investment bank also said it would sell a $5 billion stake to China Investment Corp., a sovereign wealth fund, to shore up its capital. The sale, which would give the Chinese government a stake of about 9.9 percent in one of Wall Street's biggest investment banks, is the latest example of a foreign investor aiding a Western financial firm after the housing meltdown.
Morgan Stanley's fourth-quarter loss of $3.59 billion, or $3.61 a share, was a sharp drop from its year-earlier profit of $1.98 billion, or $1.87 a share. Analysts surveyed by Bloomberg News had expected a loss of 39 cents a share.
With the second write-down, Morgan Stanley has lowered the value of its subprime holdings by $9.4 billion, one of the largest devaluations on Wall Street.
In a statement, the bank's chief executive, John Mack, said he took full responsibility and would forgo a bonus for 2007.
"The write-down Morgan Stanley took this quarter is deeply disappointing - to me, to our colleagues, to our board and to our shareholders," Mack said. "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."
That write-down took its toll on Morgan Stanley's institutional securities business, which posted a pretax loss of $6.48 billion, compared with a year-earlier profit of $2.2 billion. Its net revenue was a loss of $3.4 billion, compared with net revenue gain of $5.5 billion last year.
The brunt of that was absorbed by the firm's fixed-income sales and trading business, which recorded a loss of $7.9 billion. That compares with the $2.3 billion in net revenue that it earned last year, a stark illustration of how the firm's aggressive move into the trading of mortgage-backed securities backfired as the housing markets declined.
Morgan Stanley's drastic losses may heighten speculation about the fate of Mack, who returned to the firm in 2005 after the removal of his predecessor, Philip Purcell. One of Mack's signature changes was to push the firm further into trading using its own capital, emulating its most profitable rival, Goldman Sachs. Goldman reported a modest gain in fourth-quarter profit Tuesday.
Similar trading losses at Merrill Lynch and Citigroup led to the ouster of the chief executives at those firms and engendered talk about a similar move against Bear Stearns's chief executive, James Cayne. Bear is to report its fourth-quarter results Thursday and is also expected to take a loss.
Mack has already reshuffled his bank's management, most notably by firing Zoe Cruz, the executive who managed Morgan Stanley's trading operations and Mack's heir apparent.
Not all of Morgan Stanley's news Wednesday was negative.
The firm's global wealth management business reported net income of $378 million for the quarter, up 124 percent from a year earlier. Its asset management unit's income reported $294 million in net income for the quarter, a slight gain over last year.
Even its institutional securities unit had some bright spots. Morgan Stanley's financial advisory business, including advising companies in mergers and acquisitions, reported $779 million in revenue, a 30 percent increase owing to higher deal flow. But that may fall off soon if tighter credit markets hamper it.
The firm's equity sales and trading revenue, as opposed to debt trading, reported $2.5 billion in revenue, up 72 percent over the same period last year.
In taking a major investment from the Chinese sovereign wealth fund, Morgan Stanley is following a model set by Citigroup and UBS, two other financial giants badly damaged by their exposure to securities backed by risky home loans. Citigroup sold a 4.9 percent stake to Abu Dhabi's investment arm, while UBS sold stakes to the Singapore government and an unidentified Middle Eastern investor.
The stake taken by the Chinese investment firm will be passive and give it no special rights to name directors, Morgan Stanley said. China Investment Corp., also known as CIC, will purchase equity units that will be converted into common shares on Aug. 17, 2010. The units will pay a fixed annual rate of 9 percent quarterly.
"We are delighted to welcome CIC as a long-term investor in Morgan Stanley and believe it is an important step in increasing the flow of capital between our countries and across these increasingly critical markets," Mack said in the statement. "The investment from CIC will help to strengthen our deep ties in these growth markets and ensure that Morgan Stanley has the resources necessary to pursue growth opportunities globally across our institutional securities, global wealth management and asset management businesses into 2008 and beyond."
The deal marks a strategic shift for the $200 billion China Investment Corp. and underlines the extent to which the government fund is under the direct control of Chinese leaders.
Lou Jiwei, chairman of the fund, said in a speech last month that it sought liquidity and would mainly invest in financial instruments like index products. Lou also said that the fund, which has fewer than two dozen employees, would start hiring foreign experts before making more overseas investments.
Officials familiar with the fund also said two-thirds of its money would be used to shore up China's domestic banking industry, leaving only a third for overseas investments.
The fund declined to comment late Wednesday on its deal with Morgan Stanley. But a person close to the fund's activities said the decision to make the investment had been little expected by the fund's staff.
China Investment Corp. is under the control of the Chinese Finance Ministry, with some influence as well from the People's Bank of China, the central bank. There has been discussion in the Chinese government over whether more foreign currency should be put in the investment fund as the People's Bank of China continues to accumulate $1 billion a day buying up dollars to prevent the yuan from rising.
The investment fund bought a $3 billion stake in the initial public offering last June of Blackstone Group, the U.S. private equity firm - only to lose more than $600 million over the past six months as Blackstone shares plunged.
Keith Bradsher reported from Hong Kong.
Poster Comment:
I can't believe it is legal to let foreign governments buy into our system. We don't even let our own government do this shit. The sell out is happening right in front of our faces and we are powerless to do anything about it. Does anyone think any of these corporate candidates are going to stop the sell out of America. If we want this crap to end we need to elect Ron Paul or someone like him before it it to late. It probably already is to late.
