Morgan Stanley's Fourth Quarter Earnings Press Release (Edited)

Here's an edited version of Morgan Stanley's fourth-quarter earnings press release, issued Wednesday.

NEW YORK, December 19, 2007 

Morgan Stanley today reported income from continuing operations for the fiscal year ended November 30, 2007 of $2,563 million, or $2.37 per diluted share, compared with $6,335 million, or $5.99 per diluted share, a year ago. Net revenues of $28.0 billion were the second highest in Firm history, although they decreased 6 percent from the record revenues of $29.8 billion in 2006. Non-interest expenses of $24.6 billion were 19 percent above 2006. The return on average common equity from continuing operations was 7.8 percent, compared with 23.8 percent the prior year.

The additional $5.7 billion writedown of U.S. subprime, and other mortgage related exposures in November, and the $3.7 billion writedown as of October 31 (as announced on November 7), result in a total fourth quarter writedown of approximately $9.4 billion. In total, these writedowns reduced full year earnings per diluted share from continuing operations and the return on average common equity from continuing operations by approximately $5.80 and 19 percentage points, respectively.

The loss from continuing operations for the fourth quarter was $3,588 million, or $3.61 per diluted share, compared with income from continuing operations of $1,982 million, or $1.87 per diluted share, in the fourth quarter of 2006. Net revenues were negative $450 million, compared with $7,849 million in last year's fourth quarter. Non-interest expenses of $5.4 billion increased 3 percent from last year.

Net income for the year was $3,209 million, or $2.98 per diluted share, compared with $7,472 million, or $7.07 per diluted share, a year ago. The return on average common equity for the year was 8.9 percent compared with 23.5 percent a year ago. For the quarter, the net loss was $3,588 million, or $3.61 per diluted share, compared with net income of $2,206 million, or $2.08 per diluted share, in the fourth quarter of 2006. The results for Discover Financial Services prior to its spin-off on June 30, 2007 are reported in discontinued operations on an after-tax basis.

Full Year Business Highlights

Morgan Stanley, with the exception of its mortgage related businesses, delivered exceptionally strong performance this year:

  • Investment Banking revenues increased 31 percent from last year to a record $5.5 billion. Advisory revenues were a record $2.5 billion, up 45 percent from last year, and underwriting revenues increased 21 percent to a record $3.0 billion. Morgan Stanley ranked #1 in Global Completed M&A and #2 in Global Announced M&A.
  • Equity sales and trading delivered its best full-year results ever, with net revenues for the year increasing 38 percent to a record $8.7 billion. This reflected record results in both derivatives and prime brokerage, driven in part by our continued investment in these businesses. Equity underwriting revenues increased 48 percent to a record $1.6 billion.
  • Fixed income sales and trading achieved record results in interest rate & currency products, up 62 percent from last year, and our second best year ever in commodities, although this strong performance was more than offset by the mortgage related writedowns noted above. Fixed income underwriting revenues of $1.4 billion were a record.
  • Global Wealth Management net revenues were $6.6 billion and pre-tax income was $1.2 billion, a 127 percent increase from 2006. Pre-tax margin for the year and the fourth quarter of 17 percent and 21 percent, respectively, were the highest annual and quarterly margins since 2000. This business also achieved record annualized productivity per global representative of $853,000 in the quarter while increasing global representatives by 6 percent over the past year, and generated strong client inflows of $40 billion in the year. The Firm has also named Ellyn A. McColgan President and Chief Operating Officer of Global Wealth Management effective April 2008.
  • Asset Management delivered its best year ever, with assets under management of $597 billion, up $101 billion from a year ago, and record net inflows of $35.0 billion for the year compared with net outflows of $9.3 billion a year ago. Pre-tax income increased 72 percent to a record $1.5 billion.
  • The Firm's international businesses achieved record revenues of $15.9 billion, up 44 percent from last year, on strong results across Europe, Asia and the emerging markets.
  • As a result of the December 12, 2007, Florida Supreme Court order regarding the Coleman litigation, the Company has reversed its reserve of $360 million during the quarter.
John J. Mack, Chairman and CEO, said, "The writedown Morgan Stanley took this quarter is deeply disappointing - to me, to our colleagues, to our Board and to our shareholders. Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I've told our compensation committee that I will not accept a bonus for 2007. Across the Firm, we have moved aggressively to make the necessary changes, and these isolated losses by a small trading team in one part of the Firm should not overshadow the momentum we see in virtually all of our other businesses. In 2007, Morgan Stanley delivered record results in Investment Banking, Equities and Asset Management, and pre-tax income more than doubled in Global Wealth Management. We have put in place a new leadership team that has the right skills to help us build on that strong performance and realize the tremendous opportunities across Morgan Stanley's world-class franchise. As we look to drive growth and profitability, we also have consolidated our proprietary trading activities, further enhanced our risk management function and bolstered our already strong capital position with a long-term investment from China Investment Corporation. While market conditions are likely to be challenging, we are moving forward with an intense focus on continuing to build our global platform and delivering value for our clients and our shareholders."

Firm Further Bolsters Its Strong Capital Position With a Long-Term Investment of Approximately $5 Billion from China Investment Corporation

Morgan Stanley also said that it has entered into an agreement with China Investment Corporation Ltd. ("CIC"), as a long-term financial investor to issue new capital of approximately $5 billion through Equity Units with mandatory conversion into common stock. These Equity Units will help to further bolster the Firm's strong capital position and enhance growth opportunities globally, while also building on Morgan Stanley's deep historic ties and market leadership in China.

Mr. Mack said, "Morgan Stanley has a long-standing commitment to China and has built a clear leadership position in the region, having helped raise $45 billion for Chinese clients in the international capital markets since 2000. We are delighted to welcome CIC as a long-term investor in Morgan Stanley, and believe it is an important step in increasing the flow of capital between our countries and across these increasingly critical markets.

"The investments we've made in China over the past two years have helped strengthen our global platform and financial performance. The investment from CIC will help to strengthen our deep ties in these growth markets and ensure that Morgan Stanley has the resources necessary to pursue growth opportunities globally across our Institutional Securities, Global Wealth Management and Asset Management businesses into 2008 and beyond."

CIC's ownership in Morgan Stanley's common shares, including the conversion of these Equity Units, will be 9.9 percent or less of Morgan Stanley's total shares outstanding. CIC will be a passive financial investor. CIC will have no special rights of ownership and no role in the management of Morgan Stanley, including no right to designate a member of the Firm's Board of Directors.

Each Equity Unit is mandatorily convertible into Morgan Stanley shares at prices between a reference price and a threshold price at a premium of 20 percent to the reference price. The reference price will be determined the week of December 17, 2007. The Equity Units convert to Morgan Stanley common shares on August 17, 2010, subject to adjustment of the stock purchase date. Each Equity Unit will pay a fixed annual payment rate of 9 percent, payable quarterly.

Actions to Address Disruption in Mortgage Securities Market and Build on Momentum Across Business

Morgan Stanley has taken a number of actions to address the disruption in the mortgage securities market and continue building on the momentum across most of its businesses, including:
  • Putting in place new senior leaders, including appointing Walid Chammah and James Gorman as Co-Presidents, naming Michael Petrick as Global Head of Sales and Trading and making a series of other management changes throughout the Institutional Securities business;
  • Further enhancing the Firm's risk management function by strengthening staffing and having it report directly to Chief Financial Officer, Colm Kelleher, and creating a new, additional risk monitoring function within the trading business, which will report to Mr. Petrick; and
  • Consolidating all of the Firm's proprietary trading activities under common leadership, reporting to Mr. Petrick

Fourth Quarter Writedowns Reflects Continued Deterioration in the Mortgage Markets

During the fourth quarter, the Firm recognized a total of $9.4 billion in mortgage related writedowns as a result of the continued deterioration and lack of liquidity in the market for subprime and other mortgage related securities since August 2007. Of this total, $7.8 billion represents writedowns of the Firm's U.S. subprime trading positions (including the $3.7 billion writedown of subprime assets announced on November 7, based on valuations as of October 31). As indicated at the time of that announcement, year-end valuations depended on subsequent market conditions. Our valuation of this position as of November 30 takes into consideration a variety of inputs including observable trades, the continued deterioration in market conditions, the decline in the ABX Indices, other market developments, including mortgage remittances and updated cumulative loss data. The Firm's remaining direct net U.S. subprime exposure is $1.8 billion at November 30, down from $10.4 billion at August 31. The value of these positions remains subject to mark-to-market volatility. An updated schedule defining and detailing the Firm's direct U.S. subprime net exposure is included in the financial supplement.

In addition, the Firm's $9.4 billion in mortgage related writedowns also includes $1.2 billion of writedowns related to European Non-Conforming Loans, CMBS, ALT-A, and Non-Performing and Other Loans.

The writedowns also included an additional $0.4 billion related to securities in the Firm's subsidiary banks2 classified as "available for sale". The portfolios have been redesignated as trading effective November 30, 2007 and all future valuation adjustments will be marked-to-market through the income statement. All of the securities in these portfolios are exclusively AAA-rated residential mortgage-backed securities, and the portfolios contain no subprime whole loans, subprime residuals or CDOs.

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