Morgan Stanley's earnings drop 57 per cent in second quarter as compared to 2007

Morgan Stanley, even while beating analysts' expectations with its quarterly results, couldn't quite replicate bigger rival Goldman Sachs' success in emerging from the sub-prime mortgage crisis relatively unscathed. The New York-based bank reported a 57 per cent drop in second quarter earnings as revenue from asset management and investment banking declined while equities and fixed-income traders generated less profit.

Net income fell to $1.03 billion, or 95 cents a share, from $2.58 billion, or $2.45, a year ago. Revenue fell 38 per cent to $6.51 billion in the three months ended 30 May and the firm's annualised return on equity, a measure of how well shareholders' money is reinvested, declined to 12.3 per cent from 29.4 per cent a year ago. That compares with Goldman Sachs' second-quarter return on equity of 20.4 percent.

Morgan Stanley's fixed-income revenue decreased 85 per cent to $414 million, after losses of $436 million on mortgage- related trades and $519 million from leveraged loans and related hedges. In comparison, Goldman Sachs' dropped 29 per cent to $2.38 billion. (See: Goldman Sachs confuses analysts with better-than-expected quarterly results)

The company, the second largest investment bank after Goldman Sachs, received a big boost from two one-time items: a $698 million pretax gain from the sale of its Spanish wealth management business and a $732 million pretax gain from the secondary offering of MSCI Inc.

Gains from asset sales helped offset $245 million of severance related to job cuts, $436 million of losses from proprietary mortgage trades and $519 million of net losses on leveraged loans.

Morgan Stanley said the actions of a single London trader who violated company policies resulted in a $120 million write-down. The trader has been suspended and a full internal review is occurring, Morgan Stanley CFO Colm Kelleher said on a conference call, adding that it was an isolated situation.