Morgan Stanley posts $1.55bn profit after 'navigating' storms

Morgan Stanley yesterday became the latest bank to post results that pleasantly surprised Wall Street, mitigating the expected $2.3bn (£1.2bn) in new write-downs with news of one of its strongest ever quarters of fixed-income sales and trading revenue.

The result was hailed as the best possible answer to critics of the company, and its chief executive, John Mack, after it admitted the worst single trading loss in Wall Street history at its last financial results. A botched bet on mortgage-related securities lost the bank $8bn and sent its bottom-line results deep into the red.

In the first three months of the new financial year, however, Morgan Stanley posted a profit of $1.55bn. That was 42 per cent lower than in the same quarter last year, but exceeded analysts' forecasts.

Morgan Stanley shares surged on the figures, up about 10 per cent at their high-point during morning trading.

"We achieved strong results across our equities and fixed income sales and trading businesses this quarter, as we effectively capitalised on market opportunities and aggressively managed our positions," Mr Mack said. "We're satisfied with how Morgan Stanley navigated the ongoing market turbulence."

Meredith Whitney, an analyst at Oppenheimer & Co, said she believed the main reason for the strong performance was that Morgan Stanley had written down the value of their holdings more aggressively than most in previous quarters. Morgan Stanley also said it had been raising trading fees for its hedge fund clients.

However, Colm Kelleher, Morgan Stanley's chief financial officer, painted a bleak picture of the rest of the year for credit markets as a long period of booming lending continued to unwind. He said financial firms were continuing to "de-leverage" by reducing their own borrowing, and to "de-risk" by lending less money and on tighter terms. The structured finance markets – where exotic mortgage derivatives were created and traded – will be "challenged" or "impaired" for some time, he said.

And there were plenty of additional reminders yesterday that the pain from the credit crisis continues in many areas. Shares in most of the giant investment banks fell sharply yesterday – giving back part of their rally of the previous session – after reports surfaced that Merrill Lynch is suing one of its trading partners in a dispute over insurance against losses on complex derivates called collateralized debt obligations (CDOs). The lawsuit accused XL Capital Assurance of reneging on $3.1bn of guarantees on CDOs which have plunged in value. XL says it acted appropriately in voiding the contracts.

The spectre of prolonged legal action led analysts to predict Merrill Lynch will have to take additional write-downs on its portfolio of CDOs and the company's shares fell 11 per cent.

Shares in Thornburg Mortgage, one of the biggest independent mortgage lenders in the US, halved as it came to an agreement to prevent its creditors – who include Bear Stearns, Citigroup, Royal Bank of Scotland and UBS – seizing the company's assets. It is having to give the lenders a 27 per cent stake in the company and raise $1bn in convertible bonds, diluting existing shareholders.

Meanwhile, the Bush Administration relaxed the rules governing Fannie Mae and Freddie Mac, the government-sponsored trading companies, whose role is to buy of mortgages and mortgage-backed securities, bringing down interest rates for millions of homeowners. The two companies will be allowed to buy or guarantee $200bn more mortgage-backed securities, of the kind that have collapsed in value in recent months.