Morgan Stanley bitten by debt losses

NEW YORK -- Morgan Stanley said Wednesday third-quarter profit fell, falling short of expectations, as this summer's tumultuous debt and stock markets generated nearly $1.4 billion in losses.

The No. 2 investment bank by market value said net income fell to $1.54 billion, or $1.44 a share, in the fiscal quarter ended Aug. 31. That's down from $1.85 billion, or $1.75 a share, a year earlier, which includes a full three months of Discover Financial Services division earnings.

Excluding Riverwoods-based Discover, which was spun off at the end of June, income from continuing operations fell 7 percent to $1.47 billion, or $1.38 a share. On that basis, Morgan Stanley fell short of the average analyst forecast of $1.54 a share, according to Reuters Estimates.

Morgan Stanley reported $940 million of losses from writing down loans and commitments to finance buyouts. Market volatility also led to a $480 million loss from the bank's in-house equities trading efforts, which used the kind of strategies that generated dizzying losses at major hedge funds.

A day after Rival Lehman Brothers Holdings Corp. pleased investors with results that, while lower, were better than expected, Morgan's earnings fell, and fell short.

"This is disappointing," said Meg McMullen, president of New England Research & Management. "When Morgan Stanley has lower trading revenue, we have problems."

Fixed-income trading net revenue, Morgan's largest business and its profit engine for several years, fell 3 percent to $2.2 billion from last year.

Morgan Chief Financial Officer David Sidwell, who noted the bank reduced its level of risk-taking by the end of August, observed the first few weeks of September remained challenging.

"The challenging market conditions that we experienced in the third quarter, and the many parts of the credit markets that were intense, have continued into September," he said.

Goldman Sachs Group Inc., which reports results today, climbed 2.8 percent, as the Federal Reserve's move Tuesday to cut benchmark rates sparked a financial stock rally and loosened up lending markets.

Bear Stearns Cos., which also reports today, fell 3 percent in late trading. Bear has the greatest exposure to mortgage and debt trading, two of the market's weakest areas.