Morgan Stanley momentum throttled by a nasty bump

October 20, 2010

James Gorman took a bop on the nose in the third quarter. While his peers have largely beat estimates by analysts, Morgan Stanley’s chief executive presided over results that not only missed the target but racked up an unexpected $91 million loss—and had to lean on investment gains and a tax break to fend off an even worse showing. After a decent first half of the year, the setback is disappointing.

The surprising writedown on an Atlantic City casino project pushed the firm into the red. Morgan Stanley already had taken what appeared to be a full hit on the Revel investment when deciding to offload its stake early this year. But it has yet to find a buyer at the price initially marked on the books.

Fixed income trading revenue also slumped. Granted, the twisted accounting rule that forces firms to mark their own liabilities to market made the drop from the second quarter look terrible at 64 percent. But even after stripping that out, the 24 percent fall was worse than any of its rivals. In fact, JPMorgan’s bond, currency and commodities business rose slightly, while Bank of America’s raked in 50 percent more cash than in the previous quarter.

The woes left Morgan Stanley buttressed by one-offs. There was $800 million of revenue from gains in investments housed in the institutional securities and asset management units. And another $176 million accrued thanks to a tax benefit from bringing foreign earnings back home.

It’s not all bad news, though. That Morgan Stanley’s fixed income traders had the most dismal quarter of the top banks isn’t that surprising. After multiple changes of strategy the division is still rebuilding, a task Gorman has repeatedly cautioned investors will take several quarters.

Revamps elsewhere are still running smoothly, if slowly. Wealth management’s pre-tax income rose by about a third, though its pre-tax margin, which also jumped, is only 9 percent. And even after stripping out gains on real estate investments, asset management eked out a rare profit from continuing operations. That suggests an underlying strength in the franchise that should give some comfort that, the latest noise and disappointments aside, Gorman is still largely on the right track.

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