Morgan Stanley bested its arch-rival Goldman Sachs in the past three months, better weathering the tough trading environment and recording higher profits across the company.
The investment bank's shares surged by 10 per cent after it revealed the forecast-busting results, which the new chief executive, James Gorman, said were down to the best trading revenues on Wall Street. After hanging back last year to see if the market recovery was sustainable, Morgan Stanley hired new traders but continued to keep its risks to a minimum – something that helped in the weak and volatile period after April.
Its bottom-line earnings for the three months to 30 June were $1.6bn, compared with a loss of $1.3bn in the same quarter last year. Two days ago, Goldman Sachs posted quarterly earnings of $453m, hit by disappointing results from its trading division and the $550m settlement of fraud charges against the company.
Morgan Stanley said the UK's one-off tax on bonuses cost it $361m in the quarter. Goldman sent a cheque for $600m to the British Treasury. "While markets were challenging this quarter, Morgan Stanley benefited from a deliberate and disciplined focus on execution," Mr Gorman said. "We still have a great deal of work to do across our global franchise and anticipate that the difficult market environment may continue in the months ahead. That said, we believe regulatory reforms are a key step toward restoring trust in the industry and the markets."
Mr Gorman took over day-to-day control in January following the partial retirement of John Mack, who remains executive chairman. While the trading division results pushed overall investment banking revenues up 50 per cent to $4.5bn, there was disappointment elsewhere, notably in the wealth management division, which includes the 51 per cent stake in Smith Barney that Morgan Stanley acquired from Citigroup. Customers withdrew money in the quarter, particularly after the shock of the "flash crash" in May, when the Dow Jones plunged by 1,000 points in 20 minutes.
Michael Holland, the founder of the investment management firm Holland & Co, applauded the results overall.
"John Mack and James Gorman are beginning to pull this thing together, after a long campaign," he said last night. "The revenue line is key and it shows the overall business is healthy, and it is a credit to the people reshaping the business."
Outlook for America is 'unusually uncertain', warns Bernanke
Ben Bernanke, chairman of the US Federal Reserve, has warned that the outlook for the world's largest economy is "unusually uncertain" and that unemployment would be slow to come down.
In testimony to Congress that had been eagerly awaited by financial markets, the central banking chief signalled that he saw no urgency to reduce the monetary stimulus given to the economy through the Fed's programme of quantitative easing last year.
However, he also indicated that the Fed was only at an early stage of examining its options for extra stimulus measures, should they become needed. That disappointed traders, who pushed equity markets lower by more than 1 per cent as the testimony unfolded.
Mr Bernanke's statement hewed closely to the minutes of the most recent meeting of the Fed's interest rate-setting committee, in which it was revealed that it has increased its forecasts for unemployment in the next three years and cut its forecasts for inflation.
"In all likelihood, a significant amount of time will be required to restore the nearly 8.5 million jobs that were lost over 2008 and 2009," he told the Senate banking committee. "Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognise that the economic outlook remains unusually uncertain."
The Fed has acted to depress bank interest rates by printing money to buy US government debt and mortgage-related securities, swelling its balance sheet from $800m (£525m) to around $2bn in the process. "Anyone hoping for a signal that the Fed was preparing to provide some further monetary stimulus to boost the flagging US recovery would have been sorely disappointed," said Paul Ashworth, senior US economist at Capital Economics.