Morgan Stanley profit falls, beats expectations

updated 9:18 a.m. ET June 18, 2008

NEW YORK - Morgan Stanley on Wednesday reported second-quarter profit plunged 61 percent as the credit crisis continued to take its toll on trading and investment banking.

Shares fell almost 7 percent in premarket trading on the report, even though results came in slightly ahead of Wall Street expectations.

The nation’s second-largest investment bank reported profit fell to $1.01 billion, or 95 cents per share, after paying preferred dividends, from $2.57 billion, or $2.45 per share, a year earlier. Revenue dropped to $6.51 billion from $10.52 billion last year.

Morgan Stanley was able to beat Wall Street’s already lowered expectations by raising $1.4 billion through asset sales, including its Spanish wealth management business. Analysts had expected a profit of 92 cents per share on revenue of $7.05 billion, according to Thomson Financial.

John Mack, the New York-based investment house’s chairman and chief executive, said the market’s dislocation and fallout from the credit crisis were to blame for the decline. Global banks and brokerages have written down nearly $300 billion from bets on mortgage-backed securities and other risky investments since last year.

“The difficult market conditions and lower levels of client activity impacted our results, particularly in fixed income and asset management,” he said in a statement.

He pointed out that Morgan Stanley ended the quarter with $169 billion of total liquidity, however. Since the near-collapse of Bear Stearns in March, top Wall Street banks have been closely watched to determine if they have enough free cash to cover further losses.

Morgan Stanley was able to make its numbers because it recorded a $698 million pretax gain from the sale of Spain’s Morgan Stanley Wealth Management SV, and a $732 million gain from the secondary offering of its MSCI Inc.

Those one-time gains helped offset $436 million that Morgan Stanley lost in making mortgage-related trades, and $519 million of losses on leveraged loans. The investment bank also spent $245 million on severance after laying off some 3,000 workers since last year.

The drop off in investment banking caused fees to fall nearly in half to $875 million. Meanwhile, fixed-income sales and trading revenue — the hardest hit by the implosion of the credit markets — sank 85 percent to $414 million.

Morgan Stanley, which reported its first loss as a public company in the fourth quarter, is the last of three U.S. investment banks to report results for the period ending March 30. On Monday, Lehman Brothers Holdings Inc. posted a stunning $2.8 billion loss; while Goldman Sachs Group Inc. said Wednesday that profit fell by 11 percent, but still surpassed Wall Street expectations.

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