Morgan Stanley Losing Brand Integrity And Client Trust

As posted by: Wall Street Journal

After the previous session's party, the stock market suffered a hangover Wednesday, hobbled by disappointing results from Morgan Stanley and second thoughts by investors who initially hailed the Federal Reserve's interest-rate cut.

Late morning, the Dow Jones Industrial Average was down 78.61 points, or 0.9%, at 8845.53. The Standard & Poor's 500-stock index was off 1% at 904.27. The Nasdaq Composite Index fell 1% to 1573.99.

Morgan Stanley edged lower after the bank posted a fourth-quarter net loss. Rival Goldman Sachs Group on Tuesday posted its first quarterly loss since its IPO nearly a decade ago, but its shares were lifted amid a broader market rally. Early Wednesday Goldman was up 3.8%.

Stocks soared Tuesday after the Fed said it would target a range for the fed-funds rate of between 0% and 0.25% and would consider other steps to combat the financial crisis. But caution returned to Wall Street Wednesday, with some investors seeing the Fed's move as a symptom of how dire the global financial situation remains.

Consumer-products maker Newell Rubbermaid pared its fourth-quarter forecast and said that it would cut 8% to 10% of its salaried work force. Digital-storage company Western Digital cut its expectations for revenue in the current quarter and unveiled plans to cut 5% of its total work force. Newell Rubbermaid fell nearly 28%; Western Digital rose 1.2%, after falling earlier.

Oil prices were down 27 cents at $43.33 a barrel at 11 a.m. in New York as investors awaited official confirmation that the Organization of Petroleum Exporting Countries had decided at its meeting in Algeria to cut output by two million barrels a day.

Stocks fell overall Wednesday in a choppy session, with banks under pressure and a dose of grim economic news sending jitters throughout London.

The Dow Jones Stoxx 600 Index was down 0.8% to 197.51. The U.K.'s FTSE 100 Index rose 0.4% to 4324.19, while France's CAC-40 Index fell 0.3% to 3241.92. Germany's DAX Index declined 0.5% to 4708.38.

The bank sector was notably the worst performer, pressured by BNP Paribas, which dropped 17%. It reported a pretax loss of €710 million in its corporate and investment-banking division for the first 11 months of this year, confounding hopes it had escaped the worst of the financial crisis.

Morgan Stanley's Waning Crescent

Real-Estate Deal May Lead to More Write-Downs -- And Shareholder Griping

When Richard Rainwater, the renowned Texas investor, sold Crescent Real Estate Equities Co. to Morgan Stanley for $2.78 billion early last year, some Crescent shareholders complained the price was too low.

Now it looks like Morgan Stanley's shareholders are the ones who should have been griping.

Morgan Stanley, one of the largest real-estate investors among Wall Street firms, originally planned to put Crescent's office buildings, resorts, housing projects and other properties in one of the real-estate funds it manages for institutions and wealthy individuals. But the firm decided to keep what is now $4.6 billion of assets on its balance sheet instead, exposing Morgan Stanley to potential losses. The company didn't disclose the value of the assets at the time, but the overall deal was valued at $6.5 billion, including the assumption of $3.1 billion of debt.

The reason? Morgan bought Crescent before the credit crunch hit and commercial-real-estate values started to fall. It was also before Morgan was able to launch the fund that it hoped would own the properties. That left Morgan trying to persuade investors to buy into a fund including properties with top-of-the-market prices, something Morgan was unable to do.

A Morgan Stanley spokeswoman declined to discuss Crescent. In a securities filing, the firm cited "current market conditions, valuation, size of the investment and timing of the fund" as reasons why it held onto Crescent.

'Peak-Market Price'

"It's likely that investors didn't want those properties or Morgan Stanley couldn't distribute those properties into the fund at a price that investors were willing to pay," says Cedrik Lachance, an analyst with Green Street Advisors Inc., a Newport Beach, Calif., real-estate research and trading firm. "Investors didn't want to pay the peak-market price."

Morgan Stanley marked down the value of the Crescent properties by $150 million in its fiscal second quarter ended May 31, deepening losses for its asset-management business. Additional write-downs are likely if commercial-property values keep declining.

The Crescent deal is yet another example of the damage being done to Wall Street firms by their aggressive push into commercial real estate when money was easy and prices were rising. Lehman Brothers Holdings Inc. has been hammered by ill-timed investments in California land and New York City apartment buildings. Commercial banks Wachovia Corp. and Bank of America Corp. have high exposures to deteriorating construction loans.

So far, Morgan Stanley's reported real-estate losses have been relatively small. The firm has significantly reduced the amount of commercial-real-estate debt on its balance sheet without taking the sort of painful write-downs that rivals have.

Morgan Stanley made headlines late last year when a venture led by the firm bought 11,000 house lots from home builder Lennar Corp. for $525 million, about 60% less than where Lennar carried the land on its books. While that land has likely fallen further in value, Morgan Stanley isn't at risk. The firm was able in that case to put the holdings in an investor fund, according to people familiar with the matter.

Real-estate funds, also known as opportunity funds, have become a big business on Wall Street over the past 15 years. Now more than 500 funds have been raised or are being raised from pension funds and other institutional investors, according to Real Estate Alert, a trade publication. They typically seek net returns, after management fees, of at least 10% for U.S. investors. But many of them have run into choppy waters this year because tight credit has made it very difficult to buy or sell property.

Risky Business

Investment firms without the balance sheets of large investment banks typically don't buy property for real-estate funds until the money has been raised. The benefit of buying before the money is in place is that it allows investment banks to move quickly. But they risk losing investor commitments if the property they buy becomes undesirable.

Morgan Stanley has been one of the most active real-estate fund managers. As of June 30, the New York company had $96.4 billion in real-estate assets under management, according to the firm. Morgan Stanley is about to close an approximately $1.5 billion commercial-real-estate debt fund and is in the process of raising a global real-estate fund with $10 billion in targeted equity capital, according to Real Estate Alert.

A 7% Discount

Crescent, co-founded by Mr. Rainwater and John Goff and taken public in 1994, was one of the weakest performers in the real-estate-investment-trust sector when it announced in May 2007 that it was selling itself to Morgan Stanley. The sale price represented a 7% discount to the underlying value of its real estate, analysts said at the time.

Some Crescent shareholders complained that the company could have commanded a better price by divesting itself of some resorts and other "noncore" properties and focusing on the office sector.

Since the deal was completed in August 2007, Morgan Stanley has been shedding some of the Crescent properties. It has closed the sale of about $552 million of assets, committed to selling $411 million and offered to sell an additional $1.3 billion, according to Real Capital Analytics, a research firm in New York.

Hits to Morgan Stanley

Morgan Stanley appears to have taken some financial hits on these sales.

For example, the firm sold a Denver office complex for $31.8 million in June. That property was valued at nearly $33 million a year earlier, according to Real Capital.

Among other properties Morgan Stanley is trying to unload: Greenway Plaza, a 10-building office complex in Houston. In July, the estimated value of the property was about $826 million, according to Real Estate Alert.

Crescent holders, though annoyed at the deal at first, may end up with the last laugh.

By: Linling Wei & Aaron Lucchetti
Wall Street Journal; September 10, 2008

Morgan Stanley Profit, Offers Relief for CEO

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