updated 4/22/2009 11:52:58 AM ET 2009-04-22T15:52:58

Morgan Stanley posted a bigger-than-expected quarterly loss to common shareholders of $578 million, hurt partly by the deteriorating commercial real estate market.

The bank was also hit, counterintuitively, by an improvement in the value of its own debt in the first quarter. This improvement essentially increased the amount of debt on Morgan Stanley's books.

The Wall Street firm also slashed its quarterly dividend 81 percent to 5 cents per share from 27 cents.

The New York-based company's report comes after several big bank rivals have reported better-than-expected results in the last week, boosted in many cases by strength in their investment banking businesses.

Morgan Stanley posted a loss of 57 cents per share for the January to March period, after paying more than $400 million in dividends to preferred shareholders. The company said it lost $1.6 billion in December.

Shares fell 69 cents, or 2.8 percent, to $23.96 in morning trading.

Morgan Stanley reported December separately because this year the company shifted to a traditional calendar quarter. Its fourth quarter for the previous fiscal year included September, October and November.

Morgan Stanley's first-quarter shortfall was sharper than analysts expected. They predicted a loss of 8 cents per share.

It was also worse than last year's comparable first quarter. In that period, Morgan Stanley earned $1.3 billion, or $1.26 per share.

Morgan Stanley lost $1 billion in the latest quarter from its investments in real estate, and lost $1.5 billion because its own debt gained in value as investors grew more confident about the bank's creditworthiness compared with late last year, right after Lehman Brothers collapsed.

So if Morgan Stanley had to buy its debt back at the end of the first quarter, it would have had to pay more for it than it would have at the end of last year. And accounting rules require this change to be recorded as a loss.

This was the opposite of what happened to some other banks in the first quarter — Citigroup was able to record a $2.7 billion gain because investors grew more worried about its creditworthiness, and in turn, reduced the debt on Citigroup's books.

"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," said Chairman and CEO John Mack.

He added that the bank saw strong results in investment banking, commodities, interest rates and credit products.

Other banks — Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co., and Goldman Sachs Group Inc. — have been posting first-quarter results that have topped analysts' estimates. These results were somewhat reassuring to investors, but they remain concerned about upcoming loan losses this year as unemployment rises and the housing market weakens.

"Morgan Stanley's first quarter earnings show that the current environment is still very challenging," said David Easthope, a senior analyst with consultancy Celent. "In this climate, expect Morgan Stanley to focus on continued reduction in the cost base and on maintaining its capital base as much as possible."

Chief Financial Officer Colm Kelleher said in an interview Wednesday with The Associated Press that the company "remains cautious," though he stressed Morgan Stanley has more than enough capital and cash on hand.

"I think this year is going to be a challenging year for people, but this firm has its balance sheet, liquidity and capital into a place where we are uniquely positioned to take advantage of markets where we see the right risk, justification and terms," he said.

The bank would like to repay back $10 billion in U.S. government loans, pending the results of the stress tests being administered to banks by the administration and permission from regulators, Kelleher added.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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