Morgan Stanley’s stock price might be down today in the wake of disappointing
earnings, but I don’t think that these results really counteract the relatively
good news from Lehman brothers yesterday, and I still have that weirdly
good feeling I started getting after the rate cut yesterday.
Morgan Stanley is mainly a victim of Really Bad Timing on the part of John
Mack, its CEO: he jumped feet-first into the risk pool just as all the liquidity
was draining out of it, with painful and predictable consequences. The bank
used a lot of its own capital to underwrite very large loans, which meant that
it ended up having to write off $940 million after it couldn’t sell those loans
to anybody else. What’s more, Morgan Stanley, like Goldman Sachs, behaves sometimes
like a big quantitative hedge fund, and those strategies cost it another $480
million thanks to the quant bloodbath over the past couple of months.
On the other hand, investment banking revenues grew by a very impressive 45%
to $1.4 billion, and asset-management fees increased 61% to $1.36 billion. Obviously,
those growth rates aren’t sustainable in the wake of a credit crunch. But Morgan
Stanley remains a golden franchise which should be able to find its way back
into the market’s good graces without too much difficulty: after all, this is
the first time that Mack has disappointed.