Morgan Stanley Has First Profit Drop Under Mack on Credit Rout
By Christine Harper
Sept. 19 (Bloomberg) -- Morgan Stanley, the world's second- biggest securities firm, said earnings fell 7 percent as fallout from subprime-mortgage defaults drove down fixed-income revenue for the first time since 2005.
Third-quarter profit from continuing operations declined to $1.47 billion, or $1.38 a share, from $1.59 billion, or $1.50, a year earlier, the New York-based firm said today in a statement. Earnings missed the $1.55-a-share average estimate in a Bloomberg survey of 17 analysts.
Morgan Stanley's first decline in earnings per share under Chief Executive Officer John Mack follows the 3 percent profit drop reported yesterday by smaller rival Lehman Brothers Holdings Inc. Morgan Stanley's investment bank, asset-management unit and retail brokerage failed to produce enough of a lift to offset a 3 percent erosion in fixed-income trading revenue and $877 million in losses on loans and financing commitments.
``Everything's slowing,'' Jon Fisher, who helps oversee $21 billion at Fifth Third Asset Management in Minneapolis, including Morgan Stanley shares, said before the earnings report. ``All of these firms are choking on the same issues.''
Lehman's profit fell for the first time since 2002. Yet earnings per share dropped less than analysts' estimates, and Chief Financial Officer Chris O'Meara said ``the worst of this credit contraction is behind us.''
Rate Cut
The 12-member Amex Securities Broker/Dealer Index rose after the Lehman report yesterday and then surged by the most in 15 months after the Federal Reserve cut its benchmark short-term interest rate by a half-point to 4.75 percent, reducing the cost to finance trades and loans. Morgan Stanley gained 5.6 percent, erasing its loss for the year.
Goldman Sachs Group Inc., the largest securities firm by market value, and Bear Stearns Cos. are scheduled to report fiscal third-quarter earnings tomorrow. Both firms are based in New York.
The securities industry has been hurt by the decline in demand for mortgage-backed bonds, collateralized debt obligations, high-yield bonds and leveraged loans, as borrowers with poor credit histories fell behind home-loan payments at the fastest rate in 10 years.
Morgan Stanley took a bigger role in the mortgage industry in December, just as the subprime crisis was unfolding, when it bought Saxon Capital Inc. for $705 million. In addition to being a mortgage provider, Saxon services home loans to people with patchy credit histories by collecting payments, maintaining records and foreclosing on delinquent borrowers.
Investment Banking
New York-based Merrill Lynch & Co., the third-biggest U.S. securities firm, said earlier this week that it's eliminating jobs at First Franklin Financial Corp., the subprime lender bought nine months ago for $1.3 billion. Lehman and Bear Stearns also are cutting back in mortgages.
Investment-banking fees rose 45 percent as Morgan Stanley finished the three-month period ended Aug. 31 as the world's top- ranked equity underwriter. The firm managed $17.2 billion of stock sales, up 81 percent from $9.47 billion a year earlier, according to data compiled by Bloomberg.
Morgan Stanley was third in mergers and acquisitions completed during the quarter, behind Goldman and New York-based Citigroup Inc., the data show. The firm arranged $176 billion of deals, up 55 percent from $113 billion a year earlier.
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