Wednesday, December 19, 2007

Chinese fund takes $5bn Morgan Stanley stake

By Daniel Pimlott (Financial Times)

Morgan Stanley on Wednesday said it had sold a $5bn stake to China's new sovereign wealth fund and revealed that a total of $9.4bn in mortgage-related writedowns had driven it to a fourth-quarter loss, leading its chief executive John Mack to forgo his bonus for 2007. The bank said it had been forced to write off a further $5.7bn, on top of a previously announced $3.7bn charge already taken on its holdings of troubled structured credit products in the quarter. The deepening problems in the credit markets helped drive Morgan Stanley to a net loss of $3.59bn, or $3.61 a share, compared with a profit of $1.54bn a year ago. The company said it had negative revenue of $450m, down from $7.85bn a year earlier. Analysts had expected 39 cents of loss on positive revenues of $4.23bn.

The writedowns came because of "continued deterioration and lack of liquidity in the market for subprime and other mortgage related securities since August 2007", it said. Mr Mack added: "The writedown Morgan Stanley took this quarter is deeply disappointing. Ultimately, accountability for our results rests with me, so I've told our compensation committee that I will not accept a bonus for 2007." Last year Mr Mack was awarded $40m in restricted stock and options. He said the writedown stemmed from "losses by a small trading team in one part of the firm". The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused. In order to "bolster" its capital position, the bank said it would issue about $5bn in new capital with mandatory conversion into stock to China Investment Corporation, a $200bn fund. In return CIC will be able to convert the investment into a stake of up to 9.9 per cent, but will remain a passive investor, with no role in managing the company. CIC's investment is the latest in a series of stake-building moves in Wall Street firms by Chinese groups. In June CIC bought a $3bn stake in Blackstone Group during the private-equity firm's initial public offering, while Bear Stearns in October agreed a deal with Citic Securities, China's largest listed brokerage, that will see the two groups invest $1bn in each other.

Among other significant foreign investments, Citigroup said last month it had taken a $7.5bn capital infusion from a fund owned by the Abu Dhabi government to shore up its capital after $11bn in writedowns on mortgage investments. Morgan Stanley said that $7.8bn of its losses came from subprime trading positions. It also had $1.2bn of writedowns related to European non-conforming loans, commercial mortgage backed securities, alt-A mortgages and other loans. The bank said that at the end of the quarter on November 30 it had $1.8bn in exposure to subprime, down from $10.4bn in August. Losses in its fixed income unit from the bets on the mortgage markets that went wrong were partially offset by stronger revenues from its equity trading segment, and higher fees in its investment banking advisory and wealth management services. Morgan Stanley shares were $1.59 or 3.3 per cent higher at $49.66 in mid-morning New York trading,

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