Morgan Stanley posts loss on writedowns

It was the bank's second quarterly loss in the last five quarters. Morgan Stanley shares fell 4.5 percent in early trade.

"The numbers are not good," said Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey. "They're cutting back on many, many different business lines, so it calls into question what is the return on equity going to be down the road."

Credit rating agency Moody's Investors Service reacted to the news by cutting Morgan Stanley's senior debt rating by a notch, citing both the quarterly results and the bank's exposure to the credit crisis.

The New York-based bank said its loss from continuing operations for the fiscal fourth quarter ended Nov. 30 was $2.20 billion, or $2.24 a share. Analysts' average forecast was a loss of just 33 cents a share, according to Reuters Estimates.

Morgan Stanley, which has converted to a bank holding company from an investment bank, said it was targeting an additional $2 billion in cost savings, although that figure includes the annualized effect of previously announced job cuts.

The firm's asset management unit was hit with a $1.8 billion pretax loss after markdowns on principal investments and as assets under management declined.

'IRRATIONAL PRICING'
Markdowns on leveraged loans contributed to $1.1 billion in trading losses, while virtually every one of the bank's major businesses -- from underwriting to trading -- suffered revenue declines from a year earlier.

"Nobody expected November to be as bad as it was," Morgan Stanley Chief Financial Officer Colm Kelleher said in a telephone interview, adding that asset values in the month were hammered by what he called "irrational pricing."

On Tuesday, rival Goldman Sachs sparked a rally in bank stocks and the broader market even as it reported a loss of $2.1 billion. Investors had braced for even worse results.

Morgan Stanley's decision in 2005 to emulate Goldman by taking on more risk, betting more of its capital and financing more leveraged buyouts, backfired last year when a subprime mortgage bet generated a $9.4 billion fourth-quarter loss and forced the bank to sell a $5 billion stake to China.

"They need growth and leverage on that growth to work, and right now they don't have that," said Jon Fisher, a portfolio manager at Fifth Third Asset Management. "So it's tough for them to report earnings and earnings growth with this kind of model."

Morgan Stanley got a much-needed shot in the arm in October from a $9 billion investment by Mitsubishi UFJ Financial Group Inc, and the bank said it was looking for ways to further develop its "strategic alliance" with the Japanese bank.

Morgan Stanley shares rallied 18 percent Tuesday on the Goldman results and an interest rate cut by the Federal Reserve.

Prior to the Tuesday gain, the shares had plummeted 74 percent this year. The bank was forced to raise $19 billion of fresh capital as investors lost confidence in Wall Street's highly leveraged broker-dealers.

In the year-earlier fourth quarter Morgan Stanley posted a loss of $3.59 billion, or $3.61 a share.