Morgan Stanley Profits Slip 17%:
Sub-Prime Mortgage Crisis

RTÉ (Ireland) 19sep2007

The second biggest US investment bank, Morgan Stanley, has reported a fall in its quarterly profits due to the credit crunch sparked by the sub-prime mortgage crisis.

Profit for the June to August period fell 17% to $1.54bn. The bank said it had $940m of losses due to writing down the value of mortgages and corporate loans.

Morgan Stanley said that excluding the performance of Discover Financial Services, which is the credit card division sold in June, profits fell 7% to $1.47bn.

Wall Street suffered its worst summer in years as a slowdown in housing markets triggered a broader credit crunch that hammered the value of mortgages, asset-backed securities and corporate loans earmarked for buyouts.

Wall Street's banks rallied Tuesday after Lehman Brothers Holdings reported better-than-expected results, though it still reported a 3% fall in quarterly profit.

Bank shares also rose on assurances that the worst of the credit crisis was over, and the Federal Reserve cut benchmark interest rates.

Morgan's net revenue rose 13% to $7.96 billion from last year. Like Lehman, weaker fixed income results were offset by surging investment banking and equities trading.

The market will now be looking to see how tomorrow's quarterly results from investment banks Bear Stearns and Goldman Sachs turn out.

source: 19sep2007

Morgan Stanley Fails to Match Lehman After $940m Hit

VIVEK AHUJA / Financial News (UK) 19sep2007

Morgan Stanley has dented confidence in a potential recovery in investment banking after it failed to match analysts’ estimates in the third quarter and took a $940m (€678m) hit in its sales and trading business. Lehman Brothers yesterday raised hopes that the worst of the credit crisis had passed by beating analyst expectations.

Morgan Stanley's third-quarter net profits fell 7% to $1.5bn compared to the same period last year, while the bank's earnings per share at $1.38 fell short of analysts' estimates at $1.55. Lehman yesterday yesterday cheered Wall Street as it opened the third-quarter reporting season with net profits of 3%, despite a $950m hit in fixed income trading, and exceeded analysts' expectations of earnings per share by six cents.

Net profits from continuing operations at Morgan Stanley, which do not include figures from the Discover Financial Services unit it spun off in June, slipped from $1.6bn in the third quarter last year, as costs rose faster than net revenues, which increased 13% to $8bn. Including Discover, net profits were down 17%.

Pre-tax profits at Morgan Stanley’s institutional securities unit dropped more than a fifth in the third quarter to $1.5bn despite a 2% rise in revenues, which hit $5bn.

Strong growth in equity sales and trading, advisory and underwriting revenues helped offset a 3% decline in fixed income sales and trading revenues, but the figures were overshadowed by a $877m net loss from what Morgan Stanley described as “other sales and trading”.

The bank said the net loss was primarily driven by a roughly $940m loss from “marking to market loans and closed and pipeline commitments, largely related to acquisition financing provided to non-investment grade companies”.

Lehman Brothers yesterday suffered a $950m hit in fixed income sales and trading revenues driven chiefly by a $700m loss from “very substantial valuation reductions, most significantly on leveraged loan commitments and residential mortgage-related positions”.

source: 19sep2007

Morgan Stanley Profit Drops
After Losses on LBO Loans

CHRISTINE HARPER / Bloomberg News 19sep2007

Morgan Stanley, the world's second- biggest securities firm, reported quarterly earnings that fell short of analysts' estimates because of losses on loans for leveraged buyouts and a decline in fixed-income trading revenue.

Third-quarter profit from continuing operations dropped 7 percent to $1.47 billion, or $1.38 a share, from $1.59 billion, or $1.50, a year earlier, the New York-based firm said today in a statement. Earnings missed the $1.55-a-share average estimate in a Bloomberg survey of 17 analysts, the first time in at least six quarters that Morgan Stanley failed to surpass expectations.

Morgan Stanley, the second of four Wall Street firms reporting this week, had a steeper profit slide than the 3 percent drop cited yesterday by smaller rival Lehman Brothers Holdings Inc. While Chief Executive Officer John Mack got higher revenue from equities, investment banking and money management, those units failed to offset a slump in fixed income and $877 million in writedowns, mostly on leveraged loans.

"The world that the investment banks live in has changed at least for some time," said Jordan Posner, who helps manage $1.8 billion, including Morgan Stanley shares, at Matrix Asset Advisors Inc. in New York. "The company has taken appropriate action."

Firms including Morgan Stanley have committed to provide about $320 billion of LBO loans under terms set before credit markets began deteriorating. New York-based Lehman yesterday took a $700 million loss after writing down mortgage holdings and loan commitments by $700 million.

Worse Than 1998

Colm Kelleher, Morgan Stanley's incoming chief financial officer, said in an interview that the current credit crisis is worse than the deterioration that followed Russia's debt default and the collapse of hedge fund Long-Term Capital Management LP in 1998.

"There were amazing market disruptions during this quarter," said CFO David Sidwell, who'll be succeeded by Kelleher at yearend.

Morgan Stanley, whose shares surged yesterday after Lehman reported better-than-expected earnings and the U.S. Federal Reserve cut interest rates, fell 5 cents to $68.46 as of 10:38 a.m. in composite trading on the New York Stock Exchange.

Lehman rose 2.2 percent. Goldman Sachs Group Inc., the world's largest securities by market value, advanced 2.8 percent. Goldman and Bear Stearns Cos., both based in New York, report earnings tomorrow.

Uncommon Miss

"Even in a down quarter, it is not often that bulge firms miss consensus, and results did not match up with Lehman's yesterday," David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC in New York, said in a note to investors.

Total revenue rose 13 percent to $7.96 billion. Return on equity from continuing operations, a measure of how effectively the firm reinvests earnings, dropped to 17.2 percent from 23.3 percent. Including results from the Discover credit card unit Morgan Stanley spun off in June, net income fell 17 percent to $1.54 billion, or $1.44 a share.

While equity-trading revenue rose 16 percent to $1.8 billion, it included a $480 million loss "resulting from unfavorable positioning." Fixed-income revenue slumped 3 percent to $2.2 billion on "significantly lower" credit revenue and a decline in commodities, Morgan Stanley said.

Sidwell said Morgan Stanley ended the fiscal third quarter with $31 billion in LBO financing commitments. That compares with $27 billion for Lehman, a firm about half Morgan Stanley's size.

Loan Markdowns

Morgan Stanley wrote down the value of that "pipeline" by $726 million, Sidwell said. The $877 million total markdown includes loans already made and commitments to corporate clients, and it reflects anticipated fee revenue.

Investment banking produced $1.4 billion of revenue, an increase of 45 percent. Asset-management fees increased 61 percent to $1.36 billion and Morgan Stanley's retail brokerage had revenue of $1.68 billion, up 23 percent from a year earlier.

The securities industry has been hurt by the decline in demand for mortgage-backed bonds, collateralized debt obligations, high-yield bonds and leveraged loans, as borrowers with poor credit histories fell behind on home-loan payments at the fastest rate in 10 years.

Fed Rate Cut

Borrowers may get some relief after the Federal Reserve lowered its benchmark short-term interest rate yesterday by a half-point to 4.75 percent. The cut also reducing the cost of financing trades and loans for the securities industry.

Morgan Stanley took a bigger role in mortgages in December, just as the subprime crisis was unfolding, when it bought Saxon Capital Inc. for $705 million. In addition to being a mortgage provider, Saxon services home loans to people with patchy credit histories by collecting payments, maintaining records and foreclosing on delinquent borrowers.

New York-based Merrill Lynch & Co., the third-biggest U.S. securities firm, said earlier this week that it's eliminating jobs at First Franklin Financial Corp., the subprime lender bought nine months ago for $1.3 billion. Lehman and Bear Stearns also are cutting back in mortgages.

Morgan Stanley didn't comment on mortgages in its statement.

"We're looking at this point very hard at the resources we have dedicated to this business in light of current market conditions and expectations," Sidwell said.

source: 19sep2007

Morgan Stanley’s Profit Falls Amid Big Markdowns

New York Times 19sep2007

The honeymoon is clearly over for Morgan Stanley’s chief executive, John Mack. The investment bank on Wednesday reported its first decline in quarterly earnings-per-share since Mr. Mack returned to the firm two years ago, a drop driven in large part by the sudden spasm in the credit markets over the summer.

Morgan Stanley said that its net income excluding Discover Financial Services, which it spun off in July, fell 7 percent from a year ago to $1.47 billion in the third quarter.

Including Discover, Morgan Stanley’s net income fell 17 percent from a year ago.

Much of the recent decline stemmed from $940 million in markdowns Morgan Stanley booked during the quarter ended Aug. 31. Those writedowns were at least partly related to loans whose value fell amid the credit crunch.

Just how big a hit did that $940 million represent? The markdown was responsible for shaving 33 cents a share off the firm’s earnings from continuing operations — a reduction of nearly 20 percent. (Morgan also said it booked a $480 million in trading losses from “unfavorable positions” in its quantitative strategies businesses.)

Morgan Stanley is one of many Wall Street firms on the hook for more than $300 billion in buyout-related debt that is stuck in the pipeline.

On Tuesday, Lehman Brothers reported a 3 percent decline in earnings for the third quarter, but the results were generally not as bad as Wall Street had feared. Morgan Stanley seemed to miss analysts’ expectations, however, and its stock was down about 1.5 percent in premarket trading.

Morgan Stanley is likely to emphasize that, despite the quarter’s brutal writedowns and trading losses, the firm’s overall business continued to grow during a trying period. Morgan Stanley’s net revenue in the third quarter came to $8 billion, 13 percent higher than a year ago.

“Even with these turbulent markets, Morgan Stanley still delivered strong performances across many core businesses and achieved record results in our prime brokerage, derivatives and interest rate & currencies businesses,” Mr. Mack said in a news release.

Correction: A previous version of this post incorrectly said that Morgan Stanley’s income from continuing operations fell 17 percent in the third quarter. Morgan Stanley’s net income fell 17 percent, but its income from continuing operations fell 7 percent.

source: 19sep2007

Writedowns Hurt Morgan Stanley

Net Income Down 17% 

MIKE BARRIS / Wall Street Journal 19sep2007

Morgan Stanley posted 17% drop in fiscal third-quarter net income, weaker than expected, as a $940 million writedown on loans hurt its bottom line.

The second-largest brokerage firm by market value reported net income of $1.54 billion, or $1.44 a share, for the quarter ended Aug. 31, compared with $1.85 billion, or $1.75 a share, a year earlier. On a continuing-operations basis, the company reported third-quarter earnings of $1.38 a share, versus $1.50 a year before. The writedowns reduced earnings by 33 cents a share.

Analysts polled by Thomson Financial had expected the New York company to post earnings of $1.54 a share.

Net revenue in the latest quarter rose 13% to $7.96 billion. Wall Street was looking for revenue of $8.35 billion, according to Thomson Financial. Return on equity, a key profit measure indicating how efficiently Morgan reinvests earnings, from continuing operations dropped to 17.2% from 23.3%.

Institutional securities, which includes the firm's capital-markets trading and investment-banking businesses, recorded a 2% rise in revenue to $5 billion as pretax income skidded 22% to $1.5 billion.

Fixed-income sales and trading revenue fell 3% to $2.2 billion. The firm attributed the decrease to "significantly lower" credit revenue as spread widening, lower liquidity and higher volatility resulted in lower origination, securitization and trading results across most products. Commodities revenues were down on lower trading results.

The $940 million writedown reflected the "illiquidity created by current market conditions," Morgan Stanley said.

Going into this week's earnings releases from four of the industry's biggest players, investors were worried how the brokerage firms navigated turbulent mortgage and credit markets during the summer and whether the investment banks would properly value, or mark, the falling value of their loans and trading assets.

By last year, the Wall Street firms had become some of the largest mortgage originators. But because of slumping investor demand for various debt, the brokerages are in danger of having to hold more mortgages and leveraged-buyout loans on its books than they planned with the risk of some debt continuing to lose value.

Morgan Stanley said investment-banking revenue rose 45% to $1.4 billion. Equity sales and trading revenue grew 16% to $1.8 billion. Record results in derivatives and prime brokerage were partly offset by quantitative trading losses of about $480 million.

Revenue at Morgan Stanley's global wealth-management business grew to $1.7 billion as pretax income surged 78% to $287 million amid stronger transactional revenue, including underwriting activity, asset management from growth in fee-based products and higher net interest revenue. Morgan Stanley's large retail brokerage unit gives it some ballast for bad times in contrast to some of its less-diversified rivals.

Asset management's pretax earnings rose to $491 million from $155 million. Revenue rose 61% to $1.4 billion amid higher asset management and administration fees.

The Discover credit-card unit was spun off June 30. Discover had earnings of six cents a share, compared with 25 cents a share a year earlier, but the prior year reflects a full quarter of profits, whereas this year's just one month.

Tuesday, Lehman Brothers Holdings Inc. kicked off the third-quarter earnings season for Wall Street's big independent brokers by posting a 3.2% drop in net income as more than half of the firm's revenue came from outside the U.S. Bear Stearns Cos. and Goldman Sachs Group Inc. report results Thursday.

In recent pre-market trading, Morgan Stanley shares were at $67.35 versus Tuesday's close of $68.51.

source: 19sep2007

Will Fed rate cut provide base for builders?

Morgan Stanley analyst argues Fed easing won't help housing fundamentals

JOHN SPENCE / Marketwatch 19sep2007

BOSTON — Although Tuesday's Federal Reserve rate cut may soothe the market's psyche as evidenced by stocks' rally, the event will have little if any impact on the main problems in the housing market such as the inventory glut, falling home prices, a difficult mortgage market and rising foreclosures, according to a Morgan Stanley analyst.

"While the Fed rate cut will likely help some homeowners with [adjustable-rate mortgages] that are about to reset, we believe it will have little overall impact on housing fundamentals," wrote Robert Stevenson in a report to clients Wednesday. He said he remains cautious on home-builder stocks "and would look to short the group should it trade meaningfully higher in the absence of further rate cuts."

Stocks rallied sharply on Tuesday after the Federal Open Market Committee slashed the federal funds rate by a half point as the Dow Jones Industrial Average posted its biggest rise in nearly five years.

The S&P 500 Index gained about 3% and home-builder stocks as measured by the Dow Jones U.S. Home Construction Index rose 7%.

The stocks again traded higher in early dealings Wednesday. Toll Brothers Inc. Toll Brothers, Inc was up 4.3% at last check, D.R. Horton Inc. rose 7.1%, KB Home added 6.9% and Hovnanian Enterprises Inc. gained 5.2% one day after the stock rose more than 28%.

Yet Stevenson said cheering over the bigger-than-expected Fed rate cut has drowned out more bad news for the U.S. housing market.

The number of foreclosure filings has more than doubled in the past year, according to a monthly report released by RealtyTrac. "The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable-rate loans are beginning to reset," said James Saccacio, chief executive for RealtyTrac.

Also Tuesday, the National Association of Realtors said its monthly confidence index fell in September to match an all-time low set in 1991.

The Commerce Department on Wednesday said U.S. housing starts and permits both fell in August and reached their lowest seasonally adjusted annual rates since 1995.

Home builders are facing significant headwinds aside from oversupply, tighter lending standards, foreclosures and lower prices, Stevenson said. They are also struggling against eroding book value as they write down the value of unsold homes and land.

The analyst sees cancellations accelerating due to mortgage issues and as nervous buyers back out of contracts and hope for better deals. For their part, many builders are rolling out sales campaigns featuring price cuts and other incentives to attract nervous buyers.

Time to buy?

Recession is another risk, but if the Fed continues to cut rates aggressively, Stevenson said the interest-rate-sensitive home builders are a "buy" even if the overall housing market continues to be soft.

Yet without continued rate cuts or a leveraged buyout in the builder sector, "we see few other positive catalysts," the analyst said. Alternately, over a three- to five-year period, he likes the stocks, barring a recession, even though "investors will find more attractive entry points over the next few months."

Stephen East, an analyst at Pali Research, said historically, it can be argued that during Fed easing cycles, new-home sales, housing starts and permits increase, while inventory falls.

"Thus under this framework, we can make a strong case that an easing by the Fed would signal an impending bottom for the fundamentals of the [home-building] industry," he wrote in a note this week.

However, he pointed out that during the most recent housing boom, activity reached an "irrational high" in many of the markets in which public builders operate.

"Consequently, the industry still has to fall more before a leveling and subsequent rebound can occur," East said.

Still, he likes home-builder stocks as a long-term value play.

"While we recognize that this cycle is unique, and thus has bigger potential to surprise, we also recognize the psychological avoidance of the sector of late, along with the decimation of the valuations, potentially lays the groundwork for longer term holders to buy the equities on sale now, ride out the rest of the storm, then likely profit handsomely later," East wrote.

source: 19sep2007