A "SAVAGE" downturn in markets in November plunged Morgan Stanley into a bigger-than-expected $2.2 billion (€1.5 billion) loss in the fourth quarter, as the bank's trading, advisory and prime brokerage operations were hit hard.
Morgan Stanley's results, which came a day after rival Goldman Sachs reported its first quarterly loss since listing in 1999, will deepen concerns over their ability to produce earnings growth as profit sources remain under pressure.
Morgan Stanley chief financial officer Colm Kelleher said the bank and its competitors had been wrongfooted by the US government's decision to use a $700 billion fund to purchase stakes in banks rather than to buy troubled assets.
Mr Kelleher said the US Treasury's move, announced last month, led to a sharp fall in the value of mortgage-backed securities, triggering billions of dollars in writedowns.
"Markets had a savage reaction [to the government's move] the likes of which we have never seen before," said Mr Kelleher.
The falls compounded the severe slowdown in merger activity and equity and debt issuance, tipping Morgan Stanley into a loss of $2.24 per share.
The loss was smaller than the $3.61 per share the company lost in the fourth quarter of last year but wider than analysts' expectations.
For the full year, the company reported a $1.8 billion profit from continuing operations, down from $2.6 billion in 2007.
Shares in Morgan Stanley, which received a $10 billion investment from the government earlier this year, were flat at midday in New York, underperforming the broader market, which enjoyed a strong rally.
Morgan Stanley booked $6 billion in gains in the quarter, including $3.5 billion on a $12.3 billion buyback of its own debt.
Mr Kelleher defended the buy-back as "a good trading decision" because the debt was cheap.
He said the bank had shrunk its balance sheet and reduced risk by cutting the level of debt on its books.
Morgan Stanley continues to suffer from moves three years ago designed to emulate rivals like Goldman and Lehman Brothers by taking on more trading risk, betting more capital on investments and leveraged buyouts, and building a vertically integrated mortgage business.
The wealth management operation reported a $55 million pretax loss, reflecting lower revenue and writedowns of auction-rate securities - which are almost impossible to sell this year - that it was forced by regulators to purchase from its customers.
