Morgan Stanley Posts Loss, Gets China Investment

Morgan Stanley posted a stunning fourth-quarter loss after recording a bigger-than-expected $9.4 billion of write-downs and said it sold a $5 billion stake to China Investment Corp. to bolster its capital.

Morgan Stanley
Gregory Bull
Morgan Stanley

The second-largest U.S. investment bank posted a net loss from continuing operations of $3.59 billion, or $3.61 a share, in the quarter ended Nov. 30. A year earlier Morgan had income from continuing operations of $1.98 billion, or $1.87 a share.

Morgan Stanley's operating results reflect the spin-off of its Discover Financial Services in July.

Last month Morgan warned that it would write down its exposure to U.S. subprime mortgages and related securities by $3.7 billion. But Wednesday the bank revealed it was taking an additional $5.7 billion write-down. Combined, the losses slashed earnings by $5.80 a share.

To bolster capital slashed by the write-downs, Morgan agreed to sell abut $5 billion of equity units convertible into common stock. The shares equate to a 9.9 percent stake or less of Morgan Stanley's outstanding shares. CIC, a sovereign investment fund controlled by China, will be a passive investor and have no role on the board or in the bank's management.

For the quarter net revenue was a negative $450 million, compared with $7.85 billion last year.

Analysts on average had expected Morgan Stanley to post a loss of 39 cents a share on $4.1 billion of revenue, according to Reuters Research.

The losses are the first setback under Chief Executive John Mack, who has been widely regarded as a savior since he took the helm in 2005. Mack directed the bank to take on more risk and expand several businesses, including mortgages, as he tried to close in on archrival Goldman Sachs Group.

Earlier this year those efforts were paying off, and Morgan even reported a mortgage trading profit. Yet shares of Morgan Stanley have tumbled 29 percent during the past two months as the mortgage trade backfired and delivered losses.