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Morgan Stanley Rallies After Refuting Junk Bond Loss Rumors

Brokerage: Firm said losses on high-yield issues in the 3rd and 4th quarters will total only $90 million.

October 12, 2000|From Bloomberg News, Reuters

Morgan Stanley Dean Witter & Co., its shares buffeted by rumors of large trading losses in high-yield junk bonds, tried to do damage control on Wednesday--and it seemed to work.

The firm, in an unusual announcement, said losses on corporate junk bond holdings in the third and fourth quarters will total about $90 million. That's far below the $1-billion figure that had been floating around Wall Street.

The brokerage's stock (ticker symbol: MWD) rallied after the announcement to close up $3.25 at $77.75, after falling as low as $69.63 earlier in the day on the New York Stock Exchange.

Other brokerage shares also rallied. Goldman Sachs (GS) rose $1.31 to $104 and Merrill Lynch (MER) gained $1.50 to $59.50.

Morgan Stanley's statement said losses from holding junk debt totaled 4 cents a share last quarter and have totaled as much so far this quarter.

The firm also said it doesn't expect that further markdowns of its bond holdings during the current quarter, which ends Nov. 30, will be "material."

Morgan Stanley's stock, which peaked at $109.38 on Sept. 11, has been under pressure since the firm on Sept. 21 said its third-quarter earnings missed estimates in part because of bond-trading losses.

The resignation last Thursday of Dwight Sipprelle, who ran Morgan Stanley's junk-bond department, after 16 years at the company, also fanned concern about losses.

"The market has been lopping off billions in market cap for what's a one-time trading event," said Michael Santelli, who helps manage about $1.1 billion for National City Investment in Cleveland. "Morgan Stanley is a good buy now, it's gotten killed."

The company said it issued the statement about junk losses "in light of recent market speculation about the size of losses" in that sector.

Morgan Stanley also said that the stock's recent decline had prompted it to accelerate a program to buy back its stock.

The firm's announcement came on the same day that rival brokerage Salomon Smith Barney issued a report saying that Morgan Stanley has since the start of 1998 underwritten the worst performing junk telecommunications bonds.

Of the 20 worst-performing new junk telecom bond issues since 1998, Morgan Stanley underwrote 11, the Salomon report said.

Investors have fled many telecom junk bonds this year on fears that the issuing companies may be struggling to generate enough cash flow to pay their debts.

"This may have led to institutional customers' coming back to [Morgan Stanley] in recent months for liquidity, and the firm feeling the commercial necessity to take the bonds off the clients' hands in order to preserve relationships," the Salomon report said.

Morgan Stanley had no comment.

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