Morgan Stanley's mortgage losses keep mounting

NEW YORK -- Morgan Stanley, the No. 2 U.S. investment bank, reported a $9.4 billion writedown on Wednesday from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government.

The writedown, nearly triple what Morgan Stanley warned of in November, pushed the investment house to the first quarterly loss in its 73-year history. Chairman and Chief Executive John Mack accepted blame for the fiscal fourth-quarter loss, and said he would forego his annual bonus, which last year topped $40 million.

Morgan Stanley becomes the latest on Wall Street to be punished by the unfolding credit crisis -- and to be forced to reach out to a foreign government to secure a major investment to shore up its books. Major global banks have lost $100 billion in the past six months alone.

"The results are embarrassing for me, and our firm," Mack said on a conference call with analysts. "Ultimately, accountability for our results rests with me."

Mack aggressively expanded Morgan Stanley in the past year into the home loan industry, and trading in securities that support it. That strategy backfired, and Mack pinned the disappointing results on "isolated losses by a small trading team in part of the firm" whose members were fired.

Similarly large writedowns have already caused the ouster of Merrill Lynch & Co. CEO Stan O'Neal and Citigroup Inc. CEO Charles Prince. Last month, Morgan Stanley pushed out co-President Zoe Cruz in a broader shakeup of its top ranks.

The writedowns also caused a number of global banks to seek capital from sovereign wealth funds, such as China Investment Corp.'s investment in Morgan Stanley. China's government-controlled investment vehicle will hold no more than 9.9 percent of the investment bank once its investment converts to common shares in 2010.

Morgan Stanley said it lost $3.61 billion, or $3.61 per share in the fourth quarter, compared to a profit of $2.27 billion, or $1.44 per share, a year earlier. The investment house reported negative net revenue of $450 million because of the writedowns, compared to revenue of $7.75 billion a year ago.

Results broadly missed Wall Street projections for a loss of 39 cents per share on revenue of $4.23 billion, according to analysts polled by Thomson Financial.

"This quarter will put (Morgan Stanley) in a very precarious position as it relates to keeping clients and keeping employees," Wachovia Capital Markets analyst Douglas Sipkin said in a note to clients. "Further strategic initiatives under the current leadership will likely be scrutinized by investors considering the poorly timed push into the mortgage market at the end of 2006."

The results also led to warnings about potential downgrades from major rating agencies. Among them was Standard & Poor's, which said the "dismal fourth-quarter results heightened our concern regarding its strategic direction and risk appetite."

Mack, whose very leadership and strategy has been called into question, sounded a conciliatory tone during his conference call. He said management has learned a lesson, but that Morgan Stanley has no plan to back off.

"We're going to dial it back a little bit," he said about the firm's appetite for risk. "We've been sprinting, and we'll be jogging for a while, but we will still be in the market taking risk."

China Investment Corp.

• Established in September 2007, it was created by the Chinese government to invest a portion of its $1.4 trillion in currency reserves. It is a state-controlled sovereign wealth fund.

• The corporation has $200 billion to invest, with one-third of that, or about $67 billion, reserved for overseas investments. The rest will go to investments inside China.

• In May, CIC invested $3 billion for slightly less than 10 percent of New York-based private equity firm Blackstone Group LP. As in the Morgan Stanley deal, CIC's is a passive investor in Blackstone, with no role in the management of the company.

• The CIC reports to the government of China, with key ministries represented on both its supervisory board and board of directors.