Morgan Stanley said its fourth-quarter profit will be reduced by $2.5 billion in write-downs related to the ongoing credit crisis, making it the latest Wall Street investment house to admit massive losses.
America's No. 2 investment bank, whose shares have sagged this week on speculation it might announce a sizable write-off, said Wednesday it could lose up to $6 billion if all subprime mortgage-related investments were to go bad.
So far this year, financial institutions have already suffered an estimated $55 billion of losses following a sharp increase in U.S. mortgage defaults that caused investors to avoid any securities deemed too risky.
Losses at Merrill Lynch & Co. and Citigroup Inc. caused the ouster of both their chief executives, and analysts predict more pain is in store for the financial sector.
"We felt it would take a quarter or two for the credit markets to return to normal," Morgan Stanley Chief Financial Officer Colm Kelleher told analysts on a conference call. "We now feel it will take longer to return to more normal operating levels."
Morgan Stanley said in a statement that the actual impact on the fourth quarter, which includes results for November, "will depend on future market developments and could differ from the amounts noted." The company said it used market data and cumulative loss information to conclude that half of its subprime and credit portfolio could be hurt by defaults in the range of 40 percent to 50 percent of outstanding mortgages from 2005 and 2006.
Investors sent shares higher in after-hours trading on comfort that Morgan Stanley identified the total losses it might suffer — the first Wall Street investment bank to do so. The $6 billion amount is still less than write-downs of $6.1 billion at Citi and $8.9 billion at Merrill.
Kelleher said the company has been successful during the quarter hedging some of its subprime market, including collateralized debt obligations that meld several kinds of assets together. He also said Morgan Stanley's other businesses — such as investment banking and asset management — are expected to fare well during the quarter that finishes at the end of this month.
Further, Morgan Stanley said it scaled back its total subprime exposure from $10.4 billion as of Aug. 31. There had been speculation on Wall Street that this amount was significantly higher.