The Biggest Single Loss By A Trading Desk On Wall Street

What A Carry On!

It was two-and-a-half years ago that John Mack rode in on his white charger to re-take the reins from under pressure Morgan Stanley CEO Philip Purcell. Mack promised that the firm would restore its postion as a leading investment bank by emulating Goldman Sachs and using its capital to take bigger calculated risks in the markets. Morale would improve, profits would increase and Morgan Stanley's share price would rise. Well, it's not looking so good now, with some even saying that Mack's very position is at risk for the debacle that has recently befallen the firm.

Morgan Stanley posted a massive loss of $3.56bn from continuing operations in its fiscal fourth-quarter, after writing-down $9.4bn of subprime lending-related assets (just a few weeks after pegging the write-down at $3.7bn). The firm's fixed income sales and trading group lost $7.9bn in the period. Full year earnings were down 62% to $3.44bn.

Whilst Mack has said that he bears the main responsibility for the losses (he won't take a bonus for 2007), he points the finger at a few employees who actually executed the trade which was the main cause of the losses. The Financial Times 'Lex' column reports that a dozen or so traders are said to have laid on a position to offset the cost of shorting subprime, which eventually ended up losing $7bn after a deteriorating long position in top-rated CDOs. The Guardian describes the position as possibly 'the biggest single loss by a trading desk on Wall Street'.

What makes all this so much more difficult to take, however, is the damage-limitation PR campaign coming out of Morgan Stanley. Mack says that the losses 'should not overshadow the momentum we see in virtually all our other businesses'. Who's he trying to kid ? But going one better was the firm's CFO, Colm Kelleher, who said that 'if you were to normalize our business and take out this $9.4bn charge, you would see that we had a record year across the whole enterprise'. IF. If my aunt had b.lls, Colm, she'd be my uncle. Let's face it, Morgan Stanley has got a bloody nose, and once again faces the prospect of having to rebuild its reputation and its franchise. 

John Mack is probably only in a job this morning as there is no obvious successor from within (top contender Zoe Cruz took the fall over the subprime losses a couple of weeks back), and the only decent external candidate who might have been up for the job recently got hired by Merrill Lynch (John Thain). How long Mack remains at the helm depends on how he responds to this latest Morgan Stanley crisis. And the first thing he needs to do is to accept that this terrible mess will affect the whole firm and is a disaster of the highest order.


'Keep holding your breath, folks! 'Cuz there's plenty more of this stuff to come ! All those 'super senior' positions are not so 'super' after all. And if any of the underlying bonds have been downgraded, your firm is in line for another hit! Merry Christmas, everyone'.

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