John Mack passed the test. The chief executive of Morgan Stanley saw his company post sharply lower first-quarter results, but like Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. the day before, its earnings were better than some analysts had feared.The net earnings, down 42% from year-earlier levels, are no doubt a relief for Mr. Mack, who came under fire late last year when the company released fourth-quarter results that included a $9.4 billion write-down, a $3.6 billion loss and the sale of almost 10% of the company to China Investment Corp. for a $5 billion capital infusion.
It was a blow to the company and raised questions about the amount of risk Morgan Stanley was taking, especially as mortgage-related losses were mounting across Wall Street.
The fourth-quarter loss was largely the result of a bad bet with the company's own money on securities' backed by mortgages. Morgan Stanley recorded a $1.2 billion mortgage-trading loss in the recent quarter, including some damage from that trade and $600 million in losses on Alt-A mortgages, which are given to prime borrowers who didn't fully document their income.
Despite that, the news this quarter was decidedly more positive and is sure to ease concerns that were raised late last year about the direction Mr. Mack had chosen for the company.
Morgan Stanley's net income fell to $1.55 billion, or $1.45 a share, from $2.67 billion, or $2.51 a share, a year earlier. Results included $1.1 billion in losses from marking down loans and loan commitments, ,as well as the $1.2 billion loss on mortgage bets in which Morgan Stanley risked its own cash. Net revenue fell 17% to $8.32 billion. Analysts polled by Thomson Financial had expected earnings of $1.03 a share.
"I don't want to be Pollyannaish and I did give a cautious outlook today, but I do think there are signs [of] recovery we can point to," said Morgan Stanley Chief Financial' Officer Colm Kelleher.
Mr. Kelleher said that he is comfortable with the company's liquidity and that Morgan Stanley, like other. brokerages, welcomed the Federal Reserve's decision to make
discount window-style loans, previously only available to banks, available to brokerages. This week, a host of brokerages, including Morgan Stanley, have taken advantage.
Morgan Stanley's stock, down 18% so far this year, was up 59 cents, or 1.4%, at $43.45 in New York Stock Exchange trading.
Rival brokerage house Bear Stearns was scheduled to report earnings this week, but last weekend the investment bank announced it had agreed to be bought by J.P. Morgan Chase & Co. for $2 a share.
In other areas, revenue in institutional securities, which includes trading results as well as investment banking, fell 13% to $6.21 billion. Still, it was the divi. sion's third-best showing ever. The company said its trading performance was fueled by a record showing of $3.3 billion for stock trading-which benefited from bigger volumes of customer activity, including in prime brokerage, which serves hedge funds.
by Susanne Craig
Wall Street Journal
