MS May Face Loss Post-Bailout Repayment

07-06-2009 | Source: emii.com

Corporate debt-related enhancement charges and the cost of repaying $10 billion in government bailout funds might cause Morgan Stanley to report its third straight loss, Bloomberg reports.

The firm, led by CEO John Mack, cut back principal investing and proprietary trading after losing money on bad bets, focusing instead on building its business of advising individual investors. The firm’s reduced risk-taking backfired in the first quarter, leading to lower trading revenue than rival Goldman Sachs Group. Morgan may report net income of $322 million, while Goldman Sachs is expected to report net income of $2.39 billion.

Morgan Stanley’s profit will be cut by a requirement that the company book a charge related to the narrowing of its own credit spreads, which boosts the value of certain liabilities, analysts said. The firm will also have a charge of roughly $892 million for the cost of dividends on the government funds.

“As the operating environment has improved and Morgan Stanley’s credit spreads have tightened, the firm has and will have to take spread-tightening losses that will provide a headwind to earnings going forward,” Credit Suisse Group analyst Howard Chen wrote in a note on June 30.

Morgan Stanley may report $1.8 billion of losses tied to the improvement in the firm’s credit quality, according to Chen. On June 16, Morgan said it does not plan to issue any more debt guaranteed by the government.

For the complete story, click here.