Mortgage meltdown strikes at Morgan Stanley

NEW YORK -- The firm also disclosed that the Chinese government will purchase a 9.9% stake in the investment bank for $5 billion. Its stock rose $2.01 to $50.08.

Morgan Stanley CEO John Mack expressed his disappointment with the quarterly results and said he would forgo a bonus for the year. In a conference call with analysts, Mack described the loss as "embarrassing," and blamed the write-down on bad investments made by a "small team" that has since been let go.

For the year, Morgan Stanley earned $3.44 billion, down 62% from $9.1 billion in 2006.

The fourth-quarter loss, which mangled Morgan Stanley's numbers for the year, is a direct result of the meltdown in the subprime mortgage market this summer.

Over the past few years, Morgan Stanley — like most Wall Street banks and brokerages — upped its investments in mortgage-related securities, particularly those made up of subprime mortgages. When foreclosure rates were low, as was the case until the end of 2006, those investments paid handsome returns and helped fuel record earnings across Wall Street.

But when foreclosure rates suddenly soared earlier this year, the value of those securities and other derivatives based on flows of payments from subprime mortgages suddenly plummeted.

Also in November, Morgan Stanley warned that it would write down at least $3.7 billion on mortgage-related investments. The investment bank added $5.7 billion to that sum in Wednesday's announcement.