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Morgan Stanley's loss of $177 million is much worse than predicted

The first-quarter 57-cents-a-share loss is a far cry from the 8 cents a share estimate by analysts. The brokerage had earned $1.4 billion, or $1.26 a share, in the year-earlier quarter.

April 23, 2009|Walter Hamilton

NEW YORK — Wall Street has felt better this year about Morgan Stanley's long-term future. Perversely, that helped contribute to the brokerage's poor first-quarter results.

The company surprised investors Wednesday with a larger-than-expected quarterly loss that was driven partly by accounting rules related to the valuation of the firm's debt.

But more fundamental factors also worked against the New York brokerage -- including $1 billion in real-estate-related losses.

Morgan's net loss for the quarter was $177 million, or 57 cents a share, much worse than the 8-cents-a-share loss that analysts had predicted. The company had earned $1.4 billion, or $1.26 a share, in the year-earlier quarter.

Morgan also slashed its quarterly dividend to 5 cents a share from 27 cents, a move the company said would save it $1 billion a year.

The brokerage's shares sank $2.21, or 9%, to $22.44, but remain up 40% year to date.

The company's red ink in the quarter stemmed partly from accounting rules that dictate how firms record changes in the value of their own debt. In Morgan's case, interest-rate "spreads" on the company's own bonds have narrowed this year, a seemingly positive development that shows investors feel less worried about the company's long-term financial viability.

But that narrowing forced a $1.5-billion write-down -- the logic being that Morgan now would have to pay higher prices in the open market if it were to buy back its own debt.

Still, analysts focused more on continuing real estate-related write-offs. At a time when financial giants such as Goldman Sachs Group Inc. and Wells Fargo & Co. have buoyed investors with better-than-expected first-quarter results, Morgan's disappointing performance showed how toxic assets -- particularly in commercial real estate -- continue to weigh on banks.

"On balance, Morgan Stanley is an underperformer relative to peer reports, particularly Goldman [Sachs]," analyst David Trone at Fox-Pitt Kelton Cochran Caronia Waller wrote in a report to clients.


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