Morgan Stanley 4Q Loss Bigger Than Forecast: China Invests $5 Billion

Yet another cash infusion for an investment bank suffering losses by the Chinese (the first was Bear Stearns). China state-controlled China Investment Corp, is buying securities that offer a current yield of 9% and convert into as much as 9.9% of the firm. However, the investment fund will receive no board seat or management role.

Will these investments prove to be canny moves, or be more like the Japanese investments in US securities firms 20 years ago (of which, the first, Sumitomo Bank’s stake in Goldman, was highly profitable, while the others came a cropper).

Due to Morgan Stanley’s bigger than expected losses, Morgan Stanley chairman John Mack will not take a bonus this year.

From Bloomberg:

Morgan Stanley reported a steeper- than-forecast loss after $9.4 billion of writedowns on mortgage- related holdings and received a $5 billion cash infusion from state-controlled China Investment Corp.

John Mack, chief executive officer of the second-largest U.S. securities firm, called the $3.56 billion fourth-quarter loss “deeply disappointing” and will forgo a bonus for the year, the company said today in a statement. Morgan Stanley rose 1.5 percent to $48.79 at 9:45 a.m. in New York Stock Exchange composite trading.

Mack’s strategy of expanding in mortgages and making bigger trading bets backfired as losses from securities linked to home loans more than doubled in November. He ousted Co-President Zoe Cruz, who had overseen the fixed-income unit responsible for the mortgage trades, last month and promoted James Gorman and Walid Chammah, who previously ran wealth management and the New York- based firm’s European operations.

“There was a huge risk management failure here,” said Steve Roukis, who helps oversee $1.8 billion at Matrix Asset Advisors Inc. in New York, including Morgan Stanley shares. “You’re going to see a broad undertaking by the Street to have more diversification and more hedging of all positions.”

The loss of $3.61 a share in the three months ended Nov. 30 compares with net income of $1.98 billion, or $1.87, a year earlier. Analysts were estimating a loss of 39 cents, according to a survey by Bloomberg. The loss was the first since the company went public in 1986…..

China Investment, the nation’s sovereign wealth fund, will acquire as much as 9.9 percent of Morgan Stanley, making it the company’s second-largest shareholder after Boston-based State Street Corp., according to data compiled by Bloomberg. The fund is buying securities that convert into Morgan Stanley shares and pay annual interest of 9 percent. China Investment won’t get a seat on the board or play a role in management, Morgan Stanley said in the statement.

For the full year, Morgan Stanley’s revenue fell 6 percent to $28 billion from $29.8 billion and net income decreased 60 percent to $2.56 billion.

Return on equity, a measure of how effectively the firm reinvests earnings, dropped to 7.8 percent from 23.8 percent in 2006. Goldman Sachs Group Inc., which reported a record profit yesterday, said its return on equity was 32.7 percent in 2007.

“Accountability for our results rests with me,” Mack said in the statement. “I believe in pay for performance, so I’ve told our compensation committee that I will not accept a bonus for 2007.”…

Morgan Stanley said its fixed income sales and trading group recorded a net loss of $7.9 billion in the fourth quarter, after the writedowns, which included $7.8 billion for subprime- related losses. The remainder stemmed from a decline in the value of loans, commercial mortgage-backed securities, and so- called Alt-A mortgage securities.

“Our assumptions included what at the time was deemed to be a worst-case scenario,” said Colm Kelleher, the firm’s chief financial officer, in a phone interview today. “History has proven that that worst-case scenario was not the worst case.”

Kelleher said conditions in the credit markets “clearly got worse” after September.

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  1. Yves Smith

    Thanks so much. Typos aren’t my strong suit to begin with, and the entry template hides the latter part of long headlines.

  2. Techfun

    Yea he means the one early in this line: Due to Morgan Stanley’s *igger than expected losses, Morgan Stanley chairman John Mack will not take a bonus this year.

  3. a

    So Morgan Stanley is selling 10% (?) of the firm to get 5 B USD so it can pay out 10 B Usd in bonuses this year.
    Have these IBers lost all sense of reality? Perhaps MS could sell all of itself to the Chinese, so we can let it go bankrupt with a happy heart and be done with the pests.

  4. NC Jim

    Do you have John Mack’s address so I can send a turkey for the holidays? (a real one – not the TanMan). Don’t want his family to suffer.

    Seriously though, I suspect that we will see increasing sales of businesses and (more importantly) infastructure to private equity and SWFs as states and local communities seek to close revenue shortfalls. Look for roads and bridges to be converted to toll facilities and then sold.

    Selling off the family jewels is a time honored way to survive when one cannot live within ones means – and the US cannot and has not.

  5. newsman

    How come you have to be Chinese to invest at 9 percent on this deal? I have a small sum I would be willing to offer when my 3-month CD rolls over. I too would not demand a seat on the board or a role in management.

    And I would settle for 8 percent as long as my position was senior to the chinese.

    Or do you think the principal risk would be unacceptable even under my terms?

  6. Steve

    During the conference call, Mack said the losses were attributable to just one prop desk (and none of the analysts said, `Oh, just like Amaranth, right?’). The position was described as long $14B super senior, short $2B mezz. Wow, nice desk limit (was that you, Ms. Cruz?). And Kelleher actually said they went long the $14B `to cover the cost of negative carry’ on the short position! Priceless.

  7. Yves Smith


    That’s very helpful. Heard another element of the same trade from an MS guy tonight; will use it in a quickie post.

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