Morgan Stanley’s Q3 earnings were bad. "Mack
Smacked" was the Portfolio headline, reacting to a lower profit (just
$1.54 billion, John Mack’s first quarterly earnings decline) and a nasty $940
million write-down on bad loans.
Ah, those were the days. Just look at the Q4
results: an eye-popping $3.56 billion loss, and an even more enormous
$9.4 billion write-down on bad mortgages. Many on Wall Street suspected Morgan
Stanley’s earnings might be bad, but this is literally an order of magnitude
worse than expectations:
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.
I have to say I’m quite flabbergasted at the size of the write-down. Morgan
Stanley’s meant to be an investment bank, ferchrissakes, not a lender
or a bond investor. It has no business holding that sort of quantity of mortgage-backed
bonds on its books. And indeed its pure investment-banking business seems to
be doing rather well:
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.
John Mack, like Jimmy Cayne, is foregoing his bonus for the year, which is
quite right too. He didn’t leak
the news to the WSJ in advance, maybe because he didn’t see the point in
drawing attention to it. Both Mack and Cayne must now be considered on deathwatch
– the Morgan Stanley buck stops with Mack, remember, not with the ousted
Zoe Cruz.
Oh, and did I mention? Morgan Stanley is also selling 10% of itself to China
Investment Corp. A lean and mean investment bank, like Morgan Stanley considers
itself, clearly can’t weather a $9 billion write-down without raising new capital
to cover it, so it’s good that these two announcements were made simultaneously.
That said, however, I wouldn’t be at all surprised to hear that Carol Loomis
was now looking into Morgan Stanley in much the same manner in which she investigated
Citigroup last month. Morgan Stanley would seem to have had a pretty clear
notion of the magnitude of these losses back in November, when it fired Cruz.
If that’s true, Morgan Stanley was sitting on this material information for
a good three weeks. Which would not look good.