Cash Infusion Brightens Morgan Stanley's Dismal Fourth Quarter

December 20, 2007

By Jason Simpkins, Managing Editor, Money Morning

By Jason Simpkins
Associate Editor

Morgan Stanley (MS) announced a total fourth quarter loss of $9.4 billion yesterday (Wednesday), after the company took another $5.7 billion write down on its mortgage-related assets. The same day, Morgan Stanley also announced a $5 billion cash infusion from state-controlled China Investment Corp.

The second-largest U.S. investment bank posted a net loss from continuing operations of $3.59 billion, or $3.61 per share, in the quarter ended Nov. 30.  In a statement, Chief Executive Officer John Mack said the loss was "deeply disappointing."  Mack also announced he would refuse an annual bonus this year.

In 2006, he received a $40 million bonus for his efforts. Then again, in 2006, Morgan Stanley posted $1.98 billion net income for the fourth quarter. This year has been a different story, as the company's strategy of expanding into mortgages and making bigger trading bets has backfired. Losses from securities related to home loans more than doubled in November.

"Our assumptions included, what at the time, was deemed to be a worst-case scenario," Colm Kelleher, chief financial officer at Morgan Stanley, told Bloomberg News. "History has proven that that worst-case scenario was not the worst case."

Co-President Zoe Cruz, who oversaw the fixed income unit responsible for the mortgage trades, was ousted as a result of the company's costly misstep. Morgan Stanley also said in October, that it would eliminate 900,000 jobs concentrated mostly in its once profitable mortgage units.

China Investment Corp., China's sovereign wealth fund, has seized the opportunity, by offering Morgan Stanley a much needed $5 billion cash infusion. That will raise its stake in the beleaguered financial giant to 9.9%, making it the company's second largest shareholder.

Similar deals have occurred throughout the financial sector in this turbulent time.  Citigroup (C) sold a 5% stake to an Abu Dhabi fund for $7.5 billion. UBS (UBS) received an $11.5 billion cash injection from Singapore in exchange for 9% of its equity. And Bear Stearns (BSC) sold a 6% stake to China's government-controlled Citic Securities Co. for $1 billion in October.

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