Morgan Stanley will take a $120 million revenue hit after a suspected rogue trader incorrectly valued his positions in the credit derivatives market, the Financial Times reported on Thursday.
Morgan Stanley said it had discovered the error in May and alerted the UK stock market regulator, the Financial Services Authority, while the trader was suspended pending an internal investigation.
The trader is suspected of increasing the value of his derivatives book to show his performance in a better light, a person familiar with the investigation told the FT. He had been involved in short-term trading of credit index options on the CDX index, a trader at a rival company told the paper.
The company made a $120 million "negative adjustment" to its revenues following the trader's actions, Colm Kelleher, Morgan Stanley's chief financial officer, told the paper.
"I don’t think it is a cultural issue . . . we are much better at picking up these sorts of things than we were," Kelleher told the FT.
On Wednesday, Morgan Stanley said its quarterly earnings dropped by more than 50 percent on trading losses and a slowdown in investment banking. The bank made $1.43 billion of pretax gains from asset sales.
Its shares were hammered by worries over its ability to boost earnings in the future.