Morgan Stanley curtails Wall Street optimism

Bank slumps to first-quarter loss

The parade of Wall Street banks posting better-than-expected earnings was brought to an abrupt halt yesterday by Morgan Stanley, which swung to a loss during the first three months of this year.

Much of the miss was the result of a perverse accounting rule covering the value of its own debt, but the bank also posted another $1bn (£691m) hit to the value of its portfolio of commercial real estate investments.

The company, which came to the brink of collapse during last autumn's financial panic, said it would continue to cut costs. It set aside 46 per cent less money to pay salaries and bonuses in the first quarter than it did in the same period last year, and said it would save a further $1bn a year by slashing its shareholder dividend.

Many of Morgan Stanley's business divisions were retrenching, and the disappointment compared starkly with figures from rival Goldman Sachs last week, which showed it had made outsize gains from credit-market trading.

"If people want to say it's the hare and the tortoise, I don't mind being the tortoise," said Colm Kelleher, Morgan Stanley's chief financial officer. "On a risk-adjusted basis – and we've been very focused on risk-adjusted returns – we're comfortable."

John Mack, the chief executive, said he was following a policy of prudence. "In this volatile environment, we have focused on prudent stewardship of our balance sheet, capital and risk profiles," he said. "Although the near-term environment remains challenging, we remain confident about the value we can deliver to our clients and shareholders over the long term."

Morgan Stanley was handed $10bn of US government money under the bank bailout plan last October. It is being "stress-tested" by the Treasury department to determine if it has enough capital to weather the recession.

The company's bottom-line loss was $578m for the first quarter, compared to a profit of $1.3bn the year before.

The latest figures included a $1.5bn hit to revenues from the accounting treatment of its own debt. Because the value of Morgan Stanley's bonds have rebounded, reflecting the credit markets' growing confidence in the company, the notional cost of the company buying back those bonds has risen – a fact that is treated as a loss on paper. "Actually, it is a significant positive development," Mr Mack said.

David Easthope, senior analyst with Celent, a Boston-based financial research and consulting firm, said that there were only selective bright spots in Morgan Stanley's results. "In particular, prime brokerage was weak, suggesting that hedge fund and other investment management clients have sharply curtailed activity," he said. "While some silver linings appear at MS and for the industry, it is still mostly dark clouds on the horizon."