Morgan Stanley, the No. 2 U.S. investment bank, on Wednesday reported a larger-than-expected fiscal fourth-quarter loss due to a $9.4 billion writedown from its exposure to subprime and other mortgage-related investments.
The company also said China’s government-controlled investment vehicle has invested $5 billion to help replenish its capital.
China Investment Corp., which also owns a stake in private-equity firm Blackstone Group LP, will control no more than 9.9 percent of Morgan Stanley once its investment converts to common shares in 2010.
“The writedown Morgan Stanley took this quarter is deeply disappointing — to me, to our colleagues, to our board and to our shareholders,” said Chairman and Chief Executive John Mack. “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.”
The equity units the Chinese fund purchased from Morgan Stanley will yield 9 percent per year before they are converted into common shares on Aug. 17, 2010. The fund will have no special rights of ownership or any role in management of Morgan Stanley, the company said.
Huge writedowns caused the ouster of Merrill Lynch & Co. CEO Stan O’Neal and Citigroup Inc. CEO Charles Prince. Last month, Morgan Stanley pushed out co-President Zoe Cruz in a broader shakeup of its top ranks.
Morgan Stanley said it lost $3.61 billion, or $3.61 per share in the fourth quarter, compared to a profit of $2.27 billion, or $1.44 per share, a year earlier. The investment house reported negative net revenue of $450 million because of the writedowns, compared to revenue of $7.75 billion a year ago.
The investment bank disclosed in November that it would be taking a charge of $3.7 billion because of losses in credit market investments. But the total for the quarter grew by an additional $5.7 billion, Wednesday’s report showed. The $9.4 billion worth of writedowns reduced earnings by $5.80 per share in the fourth quarter.
Results broadly missed Wall Street projections for a loss of 39 cents per share on revenue of $4.23 billion, according to analysts polled by Thomson Financial.
The company also took a $1.2 billion writedown in the third quarter. Morgan Stanley said it had about $1.8 billion worth of subprime mortgage exposure left on its books at the end of the quarter on Nov. 30, down from $10.4 billion at Aug. 31.
For the full year, Morgan Stanley’s profit plunged 62 percent to $3.44 billion from $9.10 billion in 2006. Revenue fell 6 percent to $28.03 billion from $29.84 billion in 2006.
Despite the steep declines in the fourth quarter and full year, investors were encouraged by the latest capital injection into the financial industry. In October, Bear Stearns Cos. agreed to a $1 billion cross-investment from China’s government-controlled Citic Securities Co., while Citigroup Inc. received a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government last month.
China Investment Corp. was launched in late September was to manage part of China’s roughly $1.4 trillion in foreign currency reserves is preparing to invest some of its assets in Japanese stocks, according to a media report Monday.
It is one of the world’s richest investment funds. About one-third of its assets is earmarked for investment in global financial markets.
The fund agreed in May to pay $3 billion for a 10 percent stake in Blackstone. The Chinese investment company agreed to buy nonvoting shares in Blackstone concurrent with Blackstone’s initial public offering.