Morgan Stanley posts first quarterly loss in 72 years; Sells stake to China

20 December 2007

US investment bank Morgan Stanley has turned to China for a cash injection after it reported a stunning fourth-quarter loss fuelled by $9.4 billion of losses in sub-prime mortgages and other assets. China has agreed to pump in $5 billion, which could translate into a 9.9 per cent stake in Morgan Stanley. This is the investment bank's first quarterly loss in its 72-year history.

This marks another capital infusion by a sovereign wealth fund into a major investment bank hurt by the credit crunch. Earlier, Citigroup agreed to sell a 4.9 per cent stake to Abu Dhabi for $7.5 billion, while UBS accepted a $9.75 billion investment from Singapore's investment arm.

Analysts hope Morgan Stanley's large write-down and the cash injection from China's foreign exchange fund is a sign that the sub-prime mess is beginning to unwind. But sceptics maintain that the deal is a sign of weakness.

Unlike at Merrill Lynch and Citigroup, Morgan Stanley chief executive John Mack wasn't asked to step down. But Mack, who pocketed $37 million in salary, bonus, restricted stock and other payments last year, said he would forego his bonus this year. Just last month, he ousted protégé and co-president Zoe Cruz, and shook up the firm's fixed income and risk management leadership.

Last month, Morgan Stanley said traders betting the bank's own capital had incurred losses of $3.7 billion on sub-prime mortgages. On Wednesday 19 December, the bank disclosed another $5.7 billion in write-downs, representing further declines in the mortgage trades and losses on other debt.

With the write-downs knocking down earnings by $5.80 a share, Morgan Stanley posted a net loss from continuing operations of $3.59 billion or $3.61 a share for the quarter ended 30 November. A year earlier, Morgan had profits of $1.98 billion or $1.87 a share.