NEW YORK – Morgan Stanley on Wednesday reported third-quarter profit sank 17 percent, as the No. 2 U.S. investment bank was forced to write down nearly $1 billion worth of loans amid the summer's global credit crisis.
Morgan Stanley, like others on Wall Street, was squeezed as borrowers with poor credit histories defaulted on home-loan payments at an alarming rate. This curbed investor appetite for everything from mortgage-backed bonds to loans for corporate buyouts.
It was the New York-based investment bank's first drop in earnings under Chief Executive John Mack, and follows a smaller-than-expected decline in profits from rival Lehman Brothers Holdings Inc. on Tuesday.
"This was an abnormal market with incredibly poor liquidity and many poorly performing hedges," Chief Financial Officer David Sidwell said in an interview. "I think given the extraordinarily difficult markets, we actually performed OK — and we view ourselves as very well positioned to take advantage of opportunities that arise as the markets settle down."
Profits fell to $1.54 billion, or $1.44 per share, from $1.85 billion, or $1.75 per share, in the year-ago period. This year's third quarter included only one month of results from Discover Financial Services, which split from Morgan Stanley in June.
Stripping out the credit-card unit, profit fell to $1.47 billion, or $1.38 per share, from $1.59 billion, or $1.50 per share. Stronger equity trading and investment banking fees helped drive revenue up to $7.96 billion from $7.06 billion a year earlier.
However, that still was not enough to beat Wall Street projections for a profit of $1.54 per share on $8.35 billion of revenue, according to analysts polled by Thomson Financial.
While equity-trading revenue rose 16 percent to $1.8 billion, it included a $480 million loss from quantitative investments. These positions, which use computer models to automatically decide when to buy and sell stocks, became a problem for Wall Street this summer because of the big — and often sudden — stock market swings.
The company also said it saw losses of $940 million in the quarter from the decreased market value of loans on its books as well as other financing commitments.
Investment banking was among the bright spots; revenue from the business surged 45 percent to $1.4 billion, though most of those deals occurred before the third quarter.
Morgan Stanley shares rose 48 cents to $68.99 in morning trading. The stock has tumbled 24 percent since the end of the second quarter, as financial services firms were squeezed by defaults in mortgage positions and a tightening credit environment.
It is the second of four investment banks to report results this week. On Tuesday, Lehman posted a decline in profits that was smaller than had been expected. Goldman Sachs and Bear Stearns report their results on Thursday.
Mack, who returned as CEO in mid-2005, was given a mandate to help put the investment bank on track after languishing just a few years ago. Among his biggest objectives was to increase the company's prime brokerage and asset management business, and expand investment banking operations both in the U.S. and overseas.
The company also had less exposure than peers to the market for originating mortgages to people with spotty credit. It arrived late to Wall Street's push to originate subprime loans after it bought Saxon Capital Inc. for $705 million. In addition to being a lender, Saxon services home loans — collecting payments, maintaining records and foreclosing on delinquent borrowers.