June 19, 2008 – 12:13 pm

Morgan Stanley came in with results that in some places should make Lehman Brothers feel better about themselves:

The second-largest US investment bank reported income from continuing operations of US$1.03 billion, or 95 cents a share, for its fiscal second quarter, ended May 31, down from US$2.36 billion, or US$2.45 a share, a year earlier.

Net revenue fell 38 per cent to US$6.5 billion from the same quarter last year, dragged lower in part by a contrarian bet on energy that didn’t pan out and actions by a London trader that violated company policy.

  • Investment banking fees fell by half
  • Fixed income trading net revenue sank by 85 per cent
  • Equity sales and trading revenue fell 11 per cent to US$2.1 billion
  • Real estate investment losses led to a pretax loss of US$277 million in Morgan Stanley’s asset management division.

In addition to the usual sundry of write-downs on bad loans, losses to bad trades and run of the mill incompetence, Morgan took a page from Societe Generale and blamed outright criminality on a rogue trader.

Morgan Stanley suspended a credit trader and disclosed a $120 million “negative adjustment” related to erroneous valuations of his positions, Chief Financial Officer Colm Kelleher said.

For $120M, you wonder why they mention it; in light of the $1.7B in losses and write-downs (including the aforementioned $120M) in the three months ending in May, you know they would gladly go double or nothing for a paltry $120M all day long:

As for other losses and write-downs in the quarter, in addition to that $120 million mark reversal, Morgan Stanley wrote down $390 million of exposure to bond insurers, $496 million in leveraged loans, $100 million in commercial mortgage-backed securities, $300 million in residential mortgages, $200 million in merchant banking mark-downs and $86 million in losses from structured investment vehicles.

“This has been an unusually stressed quarter,” Kelleher told Reuters. “We were very troubled by what was happening … We decided we would stay very conservative, strengthening our liquidity and capital positions.”

That statement made by Kelleher is a lie. Profits are unusual and, as the credit crunch hardens in the arteries of the world economy, these will be seen as good times. The fact of the matter is that Morgan’s profit was made from two one-time items.

Meanwhile, most of the profits came from two one-time pretax gains: $698 million from the sale of its Spanish wealth management business, and $732 million from the sale of part of its stake in MSCI Inc. The gains contributed 88 cents a share to earnings.

Morgan Stanley’s earnings report was just a Madison Avenue spin and bullshi+ side show. They are just pulling smaller and smaller rabbits from smaller and smaller hats.

“If you have to go all the way to Spain to make numbers, it’s not good. How many more rabbits do they have in their hat?” said Matt McCormick, a stock analyst at Bahl & Gaynor Investment Counsel in Cincinnati. “What’s going to be the driver of earnings growth going forward?”

Well we have no witty retort for that one Mr. McCormick, but we hazard the guess that Mack and Cabal aren’t forward looking. Rather they are looking backward to the time of the swelling credit bubble when they decided to get theirs before selling out the banks for all time. All this is a big distraction to keep the public from realizing what’s going on.


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