WALL STREET

MORGAN STANLEY SECOND-QUARTER EARNINGS WORSE THAN EXPECTED

Morgan Stanley reported an even bigger decline yesterday in second-quarter profit than the world’s largest securities firm forecast nine days ago, when Chairman and CEO Philip Purcell said he would step down.

A plunge in revenue from fixed-income trading, lower underwriting fees from stock sales, and increased legal expenses depressed fiscal second-quarter earnings 24%. Net income fell to $928 million, or 86 cents a share, from $1.22 billion, or $1.10, a year earlier, the firm said yesterday.

Morgan Stanley’s steepest quarterly profit drop in more than four years and a 9% decline in revenue add to the urgency that the board find a new leader. Mr. Purcell, 61, will retire by March after presiding over a five-year tumble of 40% in the firm’s stock and the loss of at least 55 managers, bankers, and traders in less than three months.

“The board has no choice but to look for the kind of person who can restore the franchise, repair the damage, improve the morale within the remaining people, and hire some good people from outside,” said Anthony Gifford a fund manager at Henderson Global Investors in London.

– Bloomberg News

CITIGROUP, LEGG MASON ARE NEAR $4 BILLION ASSET SWAP

Citigroup is close to an agreement to swap its asset-management unit for Legg Mason’s brokerage, plus stock and cash, in a transaction valued at about $4 billion, sources familiar with the talks said.

Citigroup would get a 15% to 20% stake in Legg Mason valued at about $1.9 billion, as much as $1 billion in cash, and control of Legg Mason’s 1,540-person brokerage group, said the sources, who declined to be identified. Baltimore-based Legg Mason would gain Citigroup’s fund-management unit, making it the fifth largest U.S. money manager with about $830 billion of assets, the sources said.

A deal with Legg Mason would be Citigroup CEO Charles Prince’s next step to unwind less-profitable parts of the company that was built by Sanford Weill, his predecessor. New York-based Citigroup agreed in January to sell Travelers Life & Annuity and most of its international insurance business for $11.5 billion.

– Bloomberg News

SEC PROBING BEAR STEARNS OVER MUTUAL FUND TRADING

Wall Street firm Bear Stearns could face fines and other sanctions from the Securities and Exchange Commission over the company’s role in improper mutual fund trading, the company reported in a regulatory filing yesterday.

In an update filed with the SEC, Bear Stearns said it has been the subject of an SEC investigation into mutual fund trading activity. A number of Wall Street firms and mutual fund companies have been heavily penalized in recent years by the SEC for improperly trading mutual funds after the markets close.

Bear Stearns has been in talks with the SEC to resolve the matter, but said in its filing SEC investigators have been authorized to bring an official action against the company. That action could lead to fines and disgorgement of past profits.

– Associated Press