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The Globe and Mail

Legal settlement drags Morgan Stanley to loss

The outside of the Morgan Stanley offices is seen in New York January 18, 2012.


A special charge pushed Morgan Stanley into the red in the fourth quarter, but the Wall Street bank still posted better-than-expected results by cutting noncompensation costs , sending its shares higher in premarket trading.

Morgan Stanley lost $275-million (U.S.), or 15 cents per share, compared with earnings of $600-million, or 41 cents per share, a year earlier. The results included a loss of $1.7-billion, or 59 cents per share, related to a settlement with MBIA Inc, announced previously.

The loss from continuing operations came to 14 cents a share, far better than the loss of 57 cents a share that Wall Street analysts had expected, on average, according to Thomson Reuters I/B/E/S.

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Morgan Stanley shares jumped 5 per cent when the New York Stock Exchange opened.

Like its Wall Street rivals, Morgan Stanley's top-line performance showed the impact of the European sovereign debt crisis. Overall revenue dropped 26 per cent, to $5.7-billion, the weakest figure since the second quarter of 2009.

Morgan Stanley did less to cut down on pay than its Wall Street rivals.

For the full year, the bank's $16.4-billion in compensation represented 51 per cent of net revenue. That compares with a 42 per cent compensation-to-revenue ratio for Goldman Sachs Group Inc. and a 34 per cent ratio for JPMorgan Chase & Co's investment bank.

Morgan Stanley's 51 per cent ratio for the year included compensation in its wealth management business, where the payout was 62 per cent. In its trading and investment banking area, the ratio was 42 per cent, excluding the MBIA settlement.

Total compensation expenses in wealth management were $8.4-billion for the year, compared with $7.2-billion in the trading and banking division.

In an interview, Chief Financial Officer Ruth Porat said Morgan Stanley tried to cut costs aggressively in some areas last year while making investments in others to build market share.

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Areas targeted for cost-cutting included trading businesses that will require more capital under new Basel 3 regulations. Areas of market-share growth for Morgan Stanley included equity derivatives, rates trading and foreign exchange trading.

"It is a painful environment; there's no question it's a painful environment, and therefore you've seen us continue to invest in the areas we think are important for growth, while at the same time being very meticulous about cost management," Ms. Porat said.

He said Morgan Stanley maintains its long-term target of cutting $1.4-billion in costs per year from the Morgan Stanley Smith Barney wealth management joint venture it shares with Citigroup Inc. The bank expects to reach $500-million in savings per year by the end of 2012.

Ms. Porat said other types of cost cuts helped bring down non-compensation expenses in the fourth quarter, even though it is a seasonally high quarter for those kind of expenses. Non-comensation expenses fell 7 per cent during the quarter to $2.34-billion.

"We're hitting costs very vigorously wherever we can -- wherever it makes sense without impeding the investment decisions we're making, so we still have growth for the future," she said.

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