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Morgan Stanley's Profit Drops 17%

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The Associated Press

Published: September 20, 2007

NEW YORK - Morgan Stanley on Wednesday said third-quarter profit sank 17 percent, as the No. 2 U.S. investment bank was forced to write down nearly $1 billion in loans amid the global credit crisis.

The investment bank, like others on Wall Street, was squeezed as borrowers with poor credit histories defaulted on home-loan payments at an alarming rate. This curbed investor appetite for everything from mortgage-backed bonds to loans for corporate buyouts.

It was Morgan Stanley's first drop in earnings under Chief Executive John Mack and comes after a smaller-than-expected decline in profit from rival Lehman Bros. Holdings on Tuesday.

Executives held out some optimism that financial markets may be starting to turn around.

'This was an abnormal market with incredibly poor liquidity and many poorly performing hedges,' Chief Financial Officer David Sidwell said. 'I think given the extraordinarily difficult markets, we actually performed OK - and we view ourselves as very well-positioned to take advantage of opportunities that arise as the markets settle down.'

Profit fell to $1.54 billion, or $1.44 a share, from $1.85 billion, or $1.75 a share, in the year-ago period. This year's third quarter included only one month of results from Discover Financial Services, which split from Morgan Stanley in June.

Stripping out the credit-card unit, profit fell to $1.47 billion, or $1.38 a share, from $1.59 billion, or $1.50 a share. Stronger equity trading and investment banking fees helped drive revenue up to $7.96 billion from $7.06 billion a year earlier.

That was not enough to beat Wall Street projections for a total profit of $1.54 a share on $8.35 billion of revenue, according to analysts surveyed by Thomson Financial.

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