Morgan Stanley Reports Worse-Than-Estimated Loss (Update1)

By Christine Harper

Dec. 19 (Bloomberg) -- Morgan Stanley, the second-biggest U.S. securities firm, reported a fourth-quarter loss of $3.56 billion, the first in the company's history, after $9.4 billion of writedowns on mortgage-related investments.

Chief Executive Officer John Mack is forgoing a bonus for the year and called the results ``deeply disappointing.'' Morgan Stanley obtained a $5 billion investment from China Investment Corp., the nation's sovereign wealth fund, the New York-based company said today in a statement.

Mack's strategy of expanding in home loans and making bigger trading bets backfired as the firm's losses from securities linked to home loans more than doubled in November. He ousted Co-President Zoe Cruz, who had overseen the fixed- income unit responsible for the mortgage holdings, last month and promoted James Gorman and Walid Chammah, who previously ran wealth management and the firm's European operations.

``Conditions have deteriorated,'' said William Fitzpatrick, who helps oversee $1.7 billion, including Morgan Stanley shares, as a financial-services analyst at Optique Capital Management in Racine, Wisconsin, before the results were announced. ``It's going to get worse before it gets better.''

The loss of $3.61 a share in the three months ended Nov. 30 compares with net income of $1.98 billion, or $1.87 a year earlier. Analysts were estimating a loss of 39 cents, according to a survey by Bloomberg.

Morgan Stanley joined competitors including Merrill Lynch & Co., Citigroup Inc. and Zurich-based UBS AG in booking losses from investments in securities, such as collateralized debt obligations, that contain subprime home loans.

Job Cuts

Morgan Stanley said in October that it was eliminating 900 jobs, mostly in the mortgage units. The firm said Nov. 7 that investments in subprime mortgages and related securities lost $3.7 billion of value in September and October, and may drop further in November.

Morgan Stanley is the third of Wall Street's largest firms to post earnings for the fiscal quarter that ended Nov. 30. Lehman Brothers Holdings Inc., the fourth-biggest by market value, reported last week that profit dropped 12 percent, the second consecutive decline, and said losses from the collapse of the subprime mortgage market will probably extend into next year.

Goldman Sachs Group Inc., the biggest U.S. securities firm, reported record fourth-quarter earnings yesterday of $3.22 billion on higher revenue from investment banking, stock trading and gains from selling power plants.

Sinking Shares

Morgan Stanley dropped 29 percent this year in New York Stock Exchange composite trading through yesterday, the worst annual decline since 2001.

Morgan Stanley ranks second after Goldman among the world's biggest advisers on mergers and acquisitions announced in 2007, data compiled by Bloomberg show. The firm advised on $42.2 billion of takeovers completed during the fiscal fourth quarter, more than double a year earlier.

In equity underwriting, Morgan Stanley managed $14.1 billion of offerings during the quarter, up from $13.6 billion a year earlier, Bloomberg data show.

To contact the reporter on this story: Christine Harper in New York at [email protected] .

Last Updated: December 19, 2007 07:49 EST