Mortgage meltdown strikes at Morgan Stanley
NEW YORK -- In a sign Wall Street's troubles are far from over, Morgan Stanley ms announced a $3.6 billion fourth-quarter loss, driven largely by a $9.4 billion write-down of mortgage-related investments.
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.
Banks and brokerage houses that bet heavily on the subprime market got burned badly. Merrill Lynch's mer surprise announcement in October that it would write off $7.9 billion in losses tied to mortgage-related securities ultimately cost CEO Stanley O'Neal his job.
In early November, Citigroup c said its losses from the decline of mortgage-related assets could be $8 billion to $11 billion. In response to those losses, Citi CEO Charles Prince also resigned.
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.
In a research note, Deutsche Bank analyst Mike Mayo wrote that the "worst subprime is behind," but indicated that the magnitude of the Morgan Stanley write-offs suggests that even bigger write-downs could be announced at Citi and Merrill Lynch.
In addition to firing the individuals who made the investments in the bulk of the subprime products, Mack dismissed co-president Zoe Cruz a few weeks ago.
"Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I've told our compensation committee that I will not accept a bonus for 2007," Mack said in a prepared statement.
Most Morgan Stanley employees, however, will receive a bonus for the year. The firm's bonus pool grew to $16.6 billion, up from $14 billion in 2006. With 48,256 employees worldwide, that averages out to $343,000 each. By contrast, the bonus pool at Goldman Sachs, which is considered the gold standard on Wall Street, grew to $12.1 billion this year. With 30,500 employees worldwide, Goldman will pay an average of $377,000 in bonus to each employee.