Wall Street bellwether Morgan Stanley (MS) on Wednesday morning reported a Q1 2009 net loss of $190 million, or 57 cents a share, compared with year-earlier net income of $1.43 billion, or $1.26 a share. The loss missed consensus estimates from most analysts by a wide margin; according to a Thomson-Reuters poll, most had expected a 8 cents a share net loss. Driving the loss were both souring real estate investments as well as an accounting quirk that saw improved spreads on the company's debt drive a $1.5bn mark to income. Read the full earnings statement. The quarterly loss could have been much worse, too, had the financial giant been required to include Dec. 2008's results in its Q1 2009 earnings -- much like Goldman Sachs (GS), a switch to bank holding company status required a change to the company's reported fiscal year, making December an orphaned month as Morgan Stanley's fiscal year-end swapped from November to December. December's net losses totalled a whopping $1.3bn, Morgan Stanley said -- sort of convenient that Dec.'s totals didn't have to be included in the quarterly summary. CEO John Mack said Morgan Stanley would have been profitable for the reported Q1 period, were it not for an improvement in the company's debt securities as investor concern over the firm's future ebbed. "Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads -- which is a significant positive development, but had a near-term negative impact on our revenues," he said in a press statement. As concerned investors had bid up risk premiums on Morgan Stanley's own debt last year, the value of the company’s debt was similarly lowered; and such a drop in fair-value of the company’s liabilities is allowed to be booked as a gain to income under an accounting standard known as SFAS 157. Morgan Stanley had booked $1.4bn and $2.1bn in paper gains during its prior fiscal Q3 2008 and Q4 2008 periods, tied to such accounting treatments -- gains that turned into a $1.5bn hit to income in the most recent quarter, as investor outlook on the Wall Street firm improved. Besides the bond impact, Morgan Stanley's bottom line was hurt by $1bn in real estate-related losses, as well, the company said. It also absorbed a $300m hit tied to U.S. subprime mortgages, and another $200m on Alt-A and prime mortgages. In total, Morgan Stanley held $5.1bn in net residential mortgage exposure at the end of March, including $2.4bn in subprime ABS and $3.0bn in prime and Alt-A loans on its books. (Net exposure includes the effect of hedging activity.) Morgan Stanley became the latest bank to cut its quarterly dividend, slashing its payout 80 percent in a bid to preserve roughly $1bn in capital. Tangible common equity -- a measure of how much of a bank's physical assets shareholders own -- was at 4.3% at the end of Q1 2009, the bank said; prior year figures were not available, as Morgan Stanley only began reporting the TCE measure this quarter as part of requirements of operating under a bank holding company charter. The company's financial supplement for Q1 2009 is available here. Write to Paul Jackson at paul.jackson@housingwire.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.