December 17, 2008 – 8:27 pm











Oh how the mighty have fallen! Morgan Stanley ,a perennial street powerhouse, has in a single quarter suffered more disasters and distresses than most companies in their entire history. In the banks fiscal fourth quarter 2008, it failed to beat the low-balled for-hire Wall Street analysts estimates, posted a $2.2B loss on write-downs of at least $4, asked for a handout, was demoted from investment bank to a savings bank, announced wholesale job cuts, and even suffered the indignities of a Moody’s downgrade.

Morgan Stanley posted a $2.2 billion fourth-quarter loss, wider than the most pessimistic analyst’s estimate, as it unexpectedly wrote down the value of fixed-income businesses and lost money in all three of its main divisions.The loss of $2.24 a share for the three months ended Nov. 30 compared with a $3.59 billion loss, or $3.61, in the same period a year earlier, the New York-based company said today in a statement.

“I don’t think anybody estimated the impact of the price destruction that took place in November,” Colm Kelleher, Morgan Stanley’s chief financial officer, said in an interview today. “We felt the fixed-income businesses were impaired by what took place in the quarter.”

Well, actually Colm, we have been expecting this for years now. We expected it as the credit bubble swelled through the subprime scam years. Read your blogs, Colm. We expected it as insiders juiced company profits with credit crack, pocketed their gains and stood by as their companies imploded. Colm!

Chief Executive Officer John Mack, who led the firm to its smallest annual profit in 13 years, is forgoing his bonus as the firm reinvents itself to survive the global credit crisis. Goldman Sachs Group Inc., Morgan Stanley’s larger rival, yesterday reported a $2.1 billion fourth-quarter loss that was smaller than some analysts expected.

Aww, poor John. He has probably already burned through the $40M bonus he received in 2006.

Morgan Stanley’s John Mack has just taken home $40 million in stock and options – the largest bonus ever given to a Wall Street CEO – and it’s expected that the record will be broken in coming days.And you can’t say that Morgan Stanley, one of the nation’s biggest brokerage houses, hasn’t had an exceptional year – its stock has risen 40 percent so far and analysts surveyed by Thomson expect the firm to report annual earnings of $7.1 billion, up 45 percent from last year’s $4.9 billion.

That’s what were talkin’ about, Colm. When the earnings and earnings potential are gone, John forgoes a meager bonus, but keeps $40M. You can bet investors wish they could now do the same.

The worth of a CEO is measured not in easy times, but hard ones. By any measure, Mack is a miserable failure to Morgan Stanley, its share holders and employees. We would like to ridicule Ole John, but we are cognizant that he is laughing all the way from the bank he just robbed.

Some things on Wall Street will never change, but smoke and mirrors cover up accounting principles can no longer perfume all the stench as it could during the bubble years.

It was the bank’s second loss in the last five quarters, and six times deeper than expected, driven by a laundry list of setbacks: $1.7 billion in writedowns of leveraged buyout loans, $800 million in writedowns of assets held in bank units and $1.8 billion in principal investment losses.

Even some of the positives were not great news for investors. Morgan Stanley recorded a $2.1 billion gain from buying back its own debt at distressed levels, and a $2 billion gain from the falling value of its own bonds.

Ok, buying back the distressed bonds on the open market was orthodox.

Banks have been booking gains on their own debt as it has fallen in value throughout the credit crunch. This sounds counterintuitive but within the logic of accounting it makes some sense. A drop in the price of a company’s bonds is treated as a decline in a liability, producing a gain. Companies using mark-to-market accounting typically don’t mark all their debt, but enough is accounted for in this way to have created sizable paper profits.

What Morgan Stanley did in the fourth quarter is notable because it locked in cash gains by buying back bonds that were trading between 60 cents and 80 cents on the dollar. The firm also booked noncash gains of $2.7 billion in the quarter as debt spreads widened.

So about that loss we were just talking about… SFAS 157 works this way: say that three months ago Morgan sold a bond for $1.00, but the deterioation of credit quality has reduced the bond value to $0.80. The $0.80 represents a $0.20 gain according to SFAS 157 fantasy. That’s legal sure enough, but isn’t going to pay anyone’s electric bill anytime soon. That’s just fine for the crooks at Morgan Stanley.

So, Morgan’s math goes like this $2.0B – ($1.7B + $1.8B +$0.8B) = $2B-$4.3B giving a $2.3B loss on $2.3B in write-downs. Using the old math, it goes more like this: $2B-$4.3B = $6.3B loss on the same write-down total.

Next, lets do some easy math. How about adding $10B in taxpayer money to the $9B investment from Japan’s Mitsubishi UFJ, giving us $19B of the total $25B the company raised for the quarter. Witness:

The company raised nearly $25 billion in capital during the quarter, the bulk of which came from a $9 billion investment from the Japanese financial firm Mitsubishi UFJ and $10 billion from the U.S. government as part of the bank bailout.

And as Morgan Stanley sinks hopelessly into the red, one would think that its Level 3 tide would be rising. But Morgan’s Level 3 has smelled fishy since roughly Q4 of 2007.

For a reality check, we would direct you to a brief but illuminating nugget that appeared in Morgan Stanley’s year-end financial results, which it filed Tuesday with regulators. Deep in the 10-K, the securities firm disclosed that during its fourth quarter, it “reclassified” about $7 billion in assets to what is known in accounting circles as “Level 3″ status. Level 3 assets are things on a balance sheet whose value on a given day is more or less a big, fat question mark — or, to put it more scientifically, whose valuation is “based on inputs that are unknowable.”

Even though Morgan Stanley will not admit that those assets have decreased in value, it has nothing nice to say about them either.

But it does mean that Morgan Stanley felt a lot less confident than it did just three months earlier about how to put a price tag on those assets. That, in turn, could imply that the debt markets are becoming more opaque instead of less — which might reasonably raise questions about the accuracy of the recent spate of multibillion-dollar write-downs at Morgan Stanley and other Wall Street firms.

Then, in a move that speaks volumes regarding Morgan Stanley’s desperation, on the same day as it reported earnings, the bank sold more junk. This time, though, the garbage went to the junkie of last resort.

Morgan Stanley on Wednesday sold $2.5 billion in bonds that will be backed by the Federal Deposit Insurance Corp in a self led deal, IFR said.The sale included $2 billion in two- and three-quarter year fixed rate notes priced to yield 107.9 basis points over comparable U.S. Treasuries, and $500 million in two- and three-quarter year floating rate notes priced at 35 basis points over the three month London interbank offered rate, said IFR, a Thomson Reuters service.

And of course, it’s Joe and Jane taxpayer on the hook in case of default. What do you think the likelihood of such a default is?

In response to the earnings release, Moody’s downgraded Morgan’s long-term senior debt rating to A2 from A1 because of the deterioration of its businesses. Morgan shares, which were down as much as 6 percent in morning trading, were up 1.1 percent at noon,

The bank’s chief financial officer, Colm Kelleher, warned in a call with analysts that 2009 would be a year of transition.

A year of transition? What’s that? Does he mean he’s going to lose a bunch of money?

“We do expect the near-term environment to be very challenging,” Mr. Kelleher said. “This recession has turned global in a relatively short time frame.”

Yep, he thinks he’s going to lose bunches of money. Well, Joe and Jane had better get ready to fork over more of their income to tax and pay higher prices for goods and services.


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