Morgan Stanley posts stunning $2.4 billion loss

Chief executive John Mack sounds the retreat from Morgan Stanley's swashbuckling days after the firm ost $2.34 per share for the quarter ended Nov. 30.
DEC 17, 2008
Morgan Stanley CEO John Mack sounded the retreat today, announcing that his firm would abandon some risky businesses after his firm posted a stunningly large $2.4 billion quarterly loss. The decision to cease certain types of proprietary trading and reduce principal investing, among other things, marks the dramatic reversal of the strategy Mr. Mack embraced when he took over in 2005: To amp up the amount of risk taken by the firm. Now that Morgan Stanley has posted its second consecutive fourth-quarter loss and the investment banking business is shattered, Mr. Mack faces huge challenges in remaking his firm, which in September converted from a hyper-aggressive investment bank into a highly regulated bank holding company and accepted a humbling $10 billion in government bailout money. “We have successfully evolved and adapted our business across numerous cycles, and the current market dislocation gives us openings…to build market share, seize new opportunities and ultimately deliver long-term value to our shareholders,” said Mr. Mack in a statement. For now, however, the situation is dismal and Morgan Stanley executives warn they don’t expect things to turn around any time soon. “I’m still reeling from what happened in November,” chief financial pfficer Colm Kelleher said on a conference call, referring to the market turmoil. The firm’s quarterly loss came to $2.34 a share — vastly larger than the 34-cent-per-share loss predicted by analysts — although somewhat better than the dismal loss of $3.6 billion in the year-earlier period. Revenue was $1.8 billion, compared to losses of $432 million in the year-earlier period when billions in mortgage-related write-downs overwhelmed sales. The firm announced an additional $2 billion in cost cuts as it prepares for a less prosperous future. In spite of the dismal numbers, the firm remains generous with employee pay, with compensation and benefits eating up 86% of fourth-quarter net revenue. Traditionally, 50% is the norm. The firm is not granting bonus pay to Mr. Mack and other top officers and said it will change its compensation practices. For the year, the firm was profitable, generating $2.3 billion in pretax earnings, though that was a third a lower than 2007. Its return on equity, a measure of profitably capital is deployed, was a miniscule 5% for the fiscal year that ended Nov. 30, though Mr. Kelleher expects it to rise to 12% to 15% when markets return to normal. The firm set aside $480 million in taxes for the year, a 42% decline from 2007. As is the case for most everyone left on Wall Street, Morgan Stanley’s core businesses are all but dormant. In addition to steep declines in underwriting and advisory revenues, asset management was a surprise trouble spot, generating a pretax loss of $1.2 billion driven by a steep $77 billion in client withdrawals from the firm’s money market and long-term bond funds. Wealth management was a bright spot, with pretax income of $1.2 billion, about the same result as in the year-earlier period. On the positive side, the firm reduced its leverage considerably. Assets declined by nearly $400 billion and now outweigh equity by 11 times, down from about 33 times a year ago. As the firm transforms into deposit-taking bank, it said it’s stepping back from “balance sheet-intensive” businesses. In addition to paring back risky trades and principal investments, it is shrinking the prime brokerage business that serves hedge funds and ceasing to write residential mortgages.

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