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Morgan Stanley reveals $2.5 bln subprime write-off

Analysis

Morgan Stanley became the latest Wall Street investment house to admit huge losses due to write-downs related to the ongoing credit crisis, announcing Wednesday its Q4 profit will be reduced by $2.5 billion.

America’s No. 2 investment bank, whose shares have tumbled this week on speculation it might announce a sizable write-off, said it could lose up to $6 billion if all subprime mortgage-related investments were to go bad. Financial institutions this year have already suffered an estimated $55 billion of losses following a sharp increase in US mortgage defaults that caused investors to avoid any securities deemed too risky. “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 Q4, 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 40-50% 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 Citigroup and $8.9 billion at Merrill Lynch & Co. (people.com.cn)

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