Morgan Stanley on Wednesday said that it lost $3.6 billion during its fiscal fourth quarter ended November 30 — the first quarterly loss in the investment bank’s history. Driving the loss was the company’s mortgage exposure, which drove a total fourth quarter writedown of $9.4 billion. Losses accelerated dramatically in November, with Morgan Stanley saying it took a stunning writedown of $5.4 billion on its mortgage assets during that month alone. The investment bank had previously announced a writedown of $3.7 billion in the value of its subprime holdings — whole loans, total rate-of-return swaps, ABS bonds (including subprime residuals) and ABS CDS — during September and October. Fourth quarter writedowns included $7.8 billion in the firm’s U.S. subprime trading positions, as well as $1.2 billion in writedowns tied to European non-conforming loans, CMBS, Alt-A, and non-performing loans. Morgan Stanley said its remaining direct net U.S. subprime exposure stood at just $1.8 billion at November 30, down from $10.4 billion at August 31 — a 90 percent drop in three months, underscoring the depths to which the mortgage crisis has reached. (Put another way, that’s 10 cents on the dollar for subprime-related assets). The losses forced Morgan Stanley to become the latest bank to seek outside capital, with the firm saying it entered into an agreement with China Investment Corporation Ltd. to issue $5 billion in equity “with mandatory conversion into common stock” (side note: apparently the Chinese would now rather invest directly in the issuer instead of buying any ABS tied to it). From the press release, details on the investment:
Each Equity Unit is mandatorily convertible into Morgan Stanley shares at prices between a reference price and a threshold price at a premium of 20 percent to the reference price. The reference price will be determined the week of December 17, 2007. The Equity Units convert to Morgan Stanley common shares on August 17, 2010, subject to adjustment of the stock purchase date. Each Equity Unit will pay a fixed annual payment rate of 9 percent, payable quarterly.
That’s a junk rate, for the record; and it equates up to 9.9 percent of the company’s outstanding common stock. Bloomberg reports the stake would make China Investment Morgan Stanley’s second-largest shareholder after Boston-based State Street Corp. The losses led CEO John Mack to voluntary cancel his annual bonus. “The writedown Morgan Stanley took this quarter is deeply disappointing – to me, to our colleagues, to our board and to our shareholders,” Mack said. “Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I’ve told our compensation committee that I will not accept a bonus for 2007.” Morgan Stanley also said that it had “enhanced” its risk management by strengthening staffing in the area and having the function report directly to CFO Colm Kelleher, as well as creating a new, additional risk monitoring function within the trading business. HW readers know from a post yesterday my stance on risk management; the fact that the above is just now taking place is good news, but it took BILLIONS in losses for it to happen?
