Morgan Stanley Bailed Out By Beijing After $9bn Write-off

Morgan Stanley became the latest bank to announce a bailout from a foreign government as the Wall Street firm reported the first quarterly loss in its 73-year history yesterday after taking writedowns of $9.4 billion (£4.7 billion) on mortgage-related investments.

The writedowns, which took Morgan Stanley to a $3.56 billion fourth-quarter loss, were so severe that the bank was forced to agree a $5 billion cash injection from the Chinese Government to prop up its capital base.

The Beijing Governments China Investment Corporation (CIC) will inject $5 billion into Morgan Stanley in return for a 9.9 per cent stake.

This makes it the banks second-biggest shareholder after State Street, the Boston asset manager.

CIC will not get a seat on Morgan Stanleys board nor direct influence over its management. It will receive 9 per cent interest instead of a dividend.

John Mack, the banks chief executive, decided not to take a bonus for 2007, just a year after granting himself the biggest payout, $40 million, made to a Morgan Stanley head. The firm scrapped its share buyback scheme.

Mr Mack said: “The writedown Morgan Stanley took this quarter is deeply disappointing ... Ultimately, accountability for our results rests with me.”

Morgan Stanleys cash infusion comes after a $9.75 billion investment in UBS by the Singapore Investment Corporation and a $7.5 billion injection into Citigroup by the Abu Dhabi Investment Authority.

Bear Stearns has tapped $1 billion of funding from CITIC, a bank controlled by China.

Meredith Whitney, an analyst with CIBC Capital Markets, said: “Banks are diluting common shareholders in order to fill capital gaps ... The companies raising capital have paid exorbitant prices to access quick capital and have therefore put incremental pressure on forward earnings.”

The size of Morgan Stanleys fourth-quarter writedowns, mostly related to high-risk American sub-prime mortgages, astonished Wall Street.

The firm had said last month that it had recorded $3.7 billion of writedowns on mortgage-related investments in September and October and that losses would continue to mount in November, but even the most pessimistic analyst predictions did not forecast that the eventual writedowns for the fourth quarter would be so high.

Colm Kelleher, Morgan Stanleys chief financial officer, said: “History has proven that that worst-case scenario was not the worst case.”

However, he said that Morgan Stanley had “total conviction” that its trading loss does not put Mr Macks position in jeopardy, adding that he is “absolutely the right person to lead this firm out of this hiccup”.

Mr Kelleher said: “The credit environment remains challenged, it will take several quarters to return to normal markets.”

Overall Morgan Stanleys net income slid 60 per cent to $2.56 billion for the year to November 30, as revenue fell by 6 per cent to $28 billion.

Standard & Poors said that it was reviewing the AAA credit rating on bond insurers such as MBIA and Ambac, which guarantee interest payments on securities in the event of a default on the underlying assets. Any indication that the insurers may not have the reserves to honour those payments will automatically reduce the value of the bonds they insure, potentially triggering fresh writeoffs for the owners of the securities.

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