AP
Morgan Stanley 1Q Profit Tops Estimates
Wednesday March 19, 4:43 pm ET
By Joe Bel Bruno, AP Business Writer
Better-Than-Expected Morgan Stanley Results Help Reassure Investors Amid Credit Crisis


NEW YORK (AP) -- Morgan Stanley posted better-than-expected quarterly earnings on Wednesday, joining those from two of its rivals and indicating that Wall Street may be getting a better grip on the credit crisis.

The nation's second-largest investment bank was able to parlay aggressive stock and bond trading into offsetting more losses linked to subprime mortgages. Morgan Stanley -- like Lehman Brothers and Goldman Sachs on Tuesday -- was also able to top Wall Street's reduced expectations by a wide margin.

Morgan Stanley's results came during a tumultuous week. Just a few days earlier, rival Bear Stearns Cos. sold itself at a fire-sale $2 per share price to JPMorgan Chase & Co. in order to avoid declaring bankruptcy. That sent a shockwave through Wall Street as investors wondered if other investment banks might be in the same predicament.

But the strong results from Morgan Stanley, Goldman and Lehman helped assuage fears of a wider meltdown in the financial system -- at least for now.

"Fact is, like it or not, this is an inherently risky business where the returns will shift to those willing to take the most leverage," said Jack Ablin, chief investment officer of Harris Private Bank. "Expectations had us in a tailspin."

The earnings results not only helped shares of the investment banks recover from the lows they hit Monday in the aftermath of Bear's sale, but also backed claims by the companies' chief executives that they could take advantage of the market's dislocation.

John Mack, Morgan Stanley's CEO, said the investment house known for its trading prowess "effectively capitalized on market opportunities and aggressively managed our positions." The company had about $2.3 billion worth of write-downs linked to the credit and housing market crisis, but one of its best trading performances in history.

Morgan Stanley wrote down about $9.4 billion during last year's second half. Global banks and brokerages have so far claimed about $200 billion worth of write-downs since last year.

"While many of our businesses are facing challenging market conditions that we expect to continue in the months ahead, we are satisfied with how Morgan Stanley navigated the ongoing market turbulence," Mack said in a statement.

The company said it earned $1.53 billion after preferred dividends, or $1.45 per share, down 42 percent from $2.66 billion, or $2.17 per share, a year earlier. Revenue fell 17 percent to $8.3 billion from $10 billion a year earlier.

But the lower results easily topped analysts' expectations for a profit of $1.03 per share on $7.19 billion of revenue, according to Thomson Financial.

Its shares closed up 59 cents at $43.45, following a 17 percent gain in Tuesday's market rally.

Morgan Stanley's institutional securities business -- which includes investment banking and trading -- posted $6.2 billion of revenue. The results marked the division's third-best quarter ever.

Meanwhile, volatility in the bond market pushed fixed-income sales and trading revenue to their second-best showing with $2.9 billion of revenue.

Though offset by mortgage write-downs, Morgan Stanley relied on robust commodities and currency markets to drive results.

"We believe (Goldman and Morgan Stanley) have shown their ability to trade challenging markets this quarter," said Roger Freeman, an analyst with Lehman Brothers. "There is hope that the Federal Reserve's aggressiveness will begin to unclog the fixed-income markets. ... This could push the group still higher over the next few sessions."

Goldman Sachs, Lehman and Morgan Stanley said they began to test a new program this week that allows them to borrow directly from the central bank to help improve the financial market's liquidity. On Sunday the Fed gave investment banks permission to borrow from its discount window, which had previously been restricted to commercial banks.

The Fed also cut the rate at which financial institutions borrow at its "discount window" to 2.5 percent from 3.5 percent in two separate actions this week.

Though all seemed to be positive steps for Wall Street, that doesn't mean the concerns about the rest of the year have been alleviated.

The fiscal first-quarter for the three banks ended Feb. 29, before most of the market turbulence that rocked Bear Stearns last week. Investors are also still waiting for Merrill Lynch & Co. to finish its first quarter at the end of the month.

And then there's the biggest worry on investors' minds.

"We remain concerned with the deteriorating economy and its impact on the results at these firms, despite (the Fed's) aid with near-term funding," said Standard & Poor's equity analyst Matthew Albrecht.