Wednesday, September 19, 2007

Morgan Stanley Misses For Bad Reasons

This is what happens today when you do not have the international exposure you need

Morgan Stanley (MS) posted 17% drop in fiscal third-quarter net income, weaker than expected. Morgan reported net income of $1.54 billion, or $1.44 a share vs. $1.85 billion, or $1.75 a share, a year earlier. On a continuing operations measure, the company reported third-quarter earnings of $1.38 a share, versus $1.50 a year before.

Why? The firm had write downs that reduced earnings by 33 cents a share. The losses consisted of its institutional securities unit having sales and trading losses of $877 million related to loans it made to companies making acquisitions, the oft mentioned "bridge loans". They said the losses were the result of its writing down the value of loans on its books by a total of $940 million saying that the "losses of approximately $940 million (were) due to the marking-to-market of loans as well as closed and pipeline commitments."

Now, it should be pointed out that Morgan did have a record quarter for revenues as they increase 13% to just shy of $8 billion. However, Morgan's earning profile is clearly to levered toward the US M&A markets which are currently hitting the brakes. Unlike Lehman (LEH) and Goldman (GS) who reports tomorrow, not enough of their earnings are coming from international activity.

In 2006's letter to shareholders CEO John Mack said one of his goals was "Leveraging our global franchise to build out key growth areas, including businesses where we already have strong leadership positions, such as commodities and prime brokerage, as well as other areas where we have started to close the gap with our peers, such as leveraged finance, residential mortgages and equity derivatives.

This effort for growth look like it resulted in a lack of discipline that lead to the almost $1 billion in write downs in these very areas.

Goldman reports tomorrow, expect write down in the fixed income securities like the other brokers have reported to date. Also expect international activity and trading activities to offset that and surprise more than a few folks.

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