Morgan Stanley, the No. 2 US investment bank, reported a US$9.4 billion writedown from bad bets on mortgage-related debt, leading it to take a US$5 billion infusion from an arm of the Chinese government.
The writedown, nearly triple what Morgan Stanley warned of last month, pushed the investment house to the first quarterly loss in its 73-year history. Chairman and chief executive John Mack accepted blame on Wednesday for the fiscal fourth-quarter loss and said he would forego his annual bonus, which last year topped US$40 million.
Morgan Stanley becomes the latest on Wall Street to be punished by the unfolding credit crisis -- and to be forced to reach out to a foreign government to secure a major investment to shore up its books. Major global banks have lost US$100 billion in the past six months alone.
"The results are embarrassing for me and our firm," Mack said on a conference call with analysts. "Ultimately, accountability for our results rests with me."
Mack aggressively expanded Morgan Stanley in the past year into the home loan industry and trading in securities that support it. That strategy backfired and Mack pinned the disappointing results on "isolated losses by a small trading team in part of the firm" whose members were fired.
Similarly large writedowns have already caused the ouster of Merrill Lynch and Co chief executive Stan O'Neal and Citigroup Inc chief executive Charles Prince. Last month, Morgan Stanley pushed out co-president Zoe Cruz in a broader shakeup of its top ranks.
The writedowns also caused a number of global banks to seek capital from sovereign wealth funds, such as China Investment Corp's investment in Morgan Stanley. China's government-controlled investment vehicle will hold no more than 9.9 percent of the investment bank once its investment is converted into common shares in 2010.
Morgan Stanley said it lost US$3.61 billion, or US$3.61 per share, in the fourth quarter, compared to a profit of US$2.27 billion, or US$1.44 per share, a year earlier. The investment house reported negative net revenue of US$450 million because of the writedowns, compared to revenue of US$7.75 billion a year ago.
Results broadly missed Wall Street projections for a loss of US$0.39 per share on revenue of US$4.23 billion, analysts polled by Thomson Financial said.
"This quarter will put [Morgan Stanley] in a very precarious position as it relates to keeping clients and keeping employees," Wachovia Capital Markets analyst Douglas Sipkin said in a note to clients. "Further strategic initiatives under the current leadership will likely be scrutinized by investors considering the poorly timed push into the mortgage market at the end of 2006."
The results also led to warnings about potential downgrades from major rating agencies. Among them was Standard & Poor's, which said the "dismal fourth quarter results heightened our concern regarding its strategic direction and risk appetite."
Mack, whose very leadership and strategy has been called into question, sounded a conciliatory tone during his conference call. He said management has learned a lesson, but that Morgan Stanley has no plan to back off.
"We're going to dial it back a little bit," he said about the firm's appetite for risk. "We've been sprinting and we'll be jogging for a while, but we will still be in the market taking risk."
Morgan Stanley said it had about US$1.8 billion in subprime mortgage exposure left on its books at the end of the quarter on Nov. 30, down from US$10.4 billion as at Aug. 31.
The equity units that China Investment Corp purchased from Morgan Stanley will yield 9 percent per year before they are converted into common shares. The Chinese fund will have no special rights of ownership or play any role in the management of Morgan Stanley.
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