Morgan Stanley's Loss Is Narrower Than Expected

Published January 19, 2012 5:27PM (EST)

NEW YORK (AP) — Morgan Stanley posted a fourth-quarter loss of $275 million Thursday, its first since early 2009, dragged down by the cost of a settlement over failed mortgage securities.

But the loss was far smaller than investors were expecting, and the company's stock was up 5 percent in the early afternoon. Morgan Stanley's loss was equivalent to 15 cents per share, versus the 43 cents analysts were predicting, according to FactSet.

The loss stemmed from Morgan Stanley's settlement last month with bond insurer MBIA, an agreement that slashed earnings by 59 cents per share. MBIA had accused Morgan Stanley of being misleading about the quality of commercial mortgage-backed securities it wanted insured.

Morgan Stanley and other banks accused the insurer of restructuring itself to avoid paying the banks' claims. While the settlement took a deep hit on quarterly results, Morgan Stanley portrayed it as one of its final steps in cleaning up problems dating from the financial crisis.

"For the first time in two years, our to-do list is not our problem list," CEO James Gorman said in a call with analysts.

Glenn Schorr, an analyst at Nomura Equity Research, said that Morgan Stanley's earnings were better than its peers, excluding the MBIA-related loss, and its stock trading fell less than at other banks. Overall, Schorr said, Morgan Stanley is "making progress cleaning up legacy issues" but "is still a work in progress."

The bank also emphasized how it had cut out some expensive payments to its largest shareholder, Japanese bank Mitsubishi UFJ Financial Group, by persuading it to convert its holdings to common stock from preferred stock.

Like its peers, Morgan Stanley has been trimming expenses and cutting jobs as the economy continues to struggle. It shed about 700 employees over the year, or about 1 percent of its workforce, bringing its total down to about 61,900 at year's end. It has plans for at least another 1,600 layoffs, which will cost an estimated $150 million.

Even so, the bank set aside more money for paying a smaller number of workers. The average compensation it paid for the year was $265,000, up from about $255,000 the year before.

Morgan Stanley's main rival, Goldman Sachs, made even deeper cuts, slashing its work force 7 percent and its compensation 21 percent. That pushed Goldman's stock up 7 percent on Wednesday, even though it also announced a 30 percent drop in quarterly revenue.

Morgan Stanley is also figuring out how to redefine itself as new government regulations crimp former sources of revenue, including certain complicated investment vehicles. New rules will also require banks to hold more capital.

Revenue fell 26 percent from a year ago to $5.7 billion. The institutional securities unit, which helps clients with investment banking services like packaging securities and raising capital, reported a 42 percent decline in revenue.

Though investment banking is always volatile, the risks are more pronounced at Morgan Stanley. Unlike some of its rivals, like JPMorgan Chase & Co. and Bank of America Corp., Morgan Stanley doesn't have a large consumer deposit base to rely on when its investment bank stumbles. Some customers, the bank said, held off on deal-making over the year because of turbulence in financial markets brought on by Europe's debt crisis.

Chief financial officer Ruth Porat said on the conference call that uncertainty about Europe was a "big cloud" over earnings growth. Gorman, however, said he didn't buy into the "hysteria" around concerns over European countries' debt obligations.

"Europe is more likely than not to resolve itself," Gorman said, though he added it would require "a couple of years, not a couple of weeks."

Gorman, who became CEO in 2010, has been slimming down the bank, selling off units like a mortgage servicing division and an asset management business. He's been emphasizing divisions like wealth management, which provide smaller returns than some investment banking operations used to but also carry a lot less risk because they're based on fees rather than markets.

Despite those efforts, Morgan Stanley's wealth management unit struggled in the quarter. Revenue fell 3 percent and profit fell 20 percent for the unit, which offers financial planning for wealthy individuals and small to medium-sized businesses. Asset management, which manages investment portfolios, also reported lower revenue and profits, thanks in part to souring investments in real estate.

Morgan Stanley's stock jumped 5 percent in the early afternoon to $18.27.

By Salon Staff

MORE FROM Salon Staff

Related Topics ------------------------------------------