Morgan Stanley Sells $5 Billion Stake to China

Morgan Stanley, the no. 2 American investment bank, reported a $9.4 billion writedown today from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government.The writedown, nearly triple what Morgan Stanley warned of in November, pushed the investment house to the first quarterly loss in its 73-year history. Chairman and Chief Executive John Mack accepted blame for the fiscal fourth-quarter loss, and said he would forgo his annual bonus.Morgan Stanley becomes the latest on Wall Street to be punished by the unfolding credit crisis — and to be forced to reach out to a foreign government to secure a major investment to shore up its books. Major global banks have lost $100 billion in the past six months alone.“The writedown Morgan Stanley took this quarter is deeply disappointing — to me, to our colleagues, to our board and to our shareholders,” Mr. Mack said. “Ultimately, accountability for our results rests with me.”Mr. Mack aggressive expanded Morgan Stanley in the past year into the home loan industry, and trading in securities that support them. That strategy backfired, and Mr. Mack pinned the disappointing results on “isolated losses by a small trading team in part of the firm.”Similarly large writedowns have already caused the ouster of the CEO of Merrill Lynch & Co., Stan O’Neal, and the CEO of Citigroup Inc., Charles Prince. Last month, Morgan Stanley pushed out co-President Zoe Cruz in a broader shakeup of its top ranks.It also caused a number of global banks to seek capital from sovereign wealth funds, such as China Investment Corp.’s investment in Morgan Stanley. China’s government-controlled investment vehicle will hold no more than 9.9% of the investment bank once its investment converts to common shares in 2010.Morgan Stanley said it lost $3.61 billion, or $3.61 a share in the fourth quarter, compared to a profit of $2.27 billion, or $1.44 a share, a year earlier. The investment house reported negative net revenue of $450 million because of the writedowns, compared to revenue of $7.75 billion a year ago.Results broadly missed Wall Street projections for a loss of 39 cents a share on revenue of $4.23 billion, according to analysts polled by Thomson Financial.“This quarter will put (Morgan Stanley) in a very precarious position as it relates to keeping clients and keeping employees, in our opinion,” a Wachovia Capital Markets analyst, Douglas Sipkin, said in a note to clients. “Further strategic initiatives under the current leadership will likely be scrutinized by investors considering the poorly timed push into the mortgage market at the end of 2006.”Morgan Stanley said it had about $1.8 billion worth of subprime mortgage exposure left on its books at the end of the quarter on November 30, down from $10.4 billion at August 31.For the full year, Morgan Stanley’s profit plunged 62% to $3.44 billion from $9.10 billion in 2006. Revenue fell 6% to $28.03 billion from $29.84 billion in 2006.Despite the steep declines in the fourth quarter and full year, investors were encouraged by the latest capital injection into the financial industry, and Morgan Stanley shares rose 5.4% to $50.67 in early trading.The equity units the Chinese fund purchased from Morgan Stanley will yield 9% a year before they are converted into common shares. The fund will have no special rights of ownership or any role in management of Morgan Stanley.China Investment Corp. was launched in late September with $200 billion in capital, one-third of which was to be invested outside of China. It is one of the world’s richest investment funds, making its American debut earlier this year with the purchase of a stake in private equity powerhouse Blackstone Group.The Morgan Stanley chief financial officer, Colm Kelleher, said in an interview the firm approached the Chinese fund over the summer, seeking capital so it could “go on the offensive” in the weakened market.

Morgan Stanley Sells $5 Billion Stake to China

Morgan Stanley Sells $5 Billion Stake to China

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