The once-mighty investment bank Morgan Stanley is watching every penny of its $1.02 billion profit in the second quarter. For some companies, the profit is enormous; for Morgan Stanley it's a disappointment. Profit for the No. 2 investment bank declined 60% from the same year-ago period, but things could have been worse, if it wasn't for the sale of $1.4 billion of some of its assets that included Spanish wealth management business, Morgan Stanley Wealth Management. But some wonder, where will Morgan Stanley's earnings numbers in future quarters be when it won't be able to count on any divestments to its bottom line?

Morgan Stanley blamed the second-quarter shaky numbers on its risky bets, resulting in a $436 million loss in mortgage securities, and a $519 million loss in leveraged loans. It also took a $245 million charge on severance from 3,000 layoffs. With the slowdown in the number of big M&A deals, Morgan Stanley saw a drop-off in investment banking fees to nearly half to $875 million. But the company is trying to remain positive, noting that the company's exposure to subprime mortgage-backed securities was cut to $300 million from $1.8 billion -- a figure that was as high as $10.8 billion in December.

"Given the turbulent environment this quarter, we stayed close to shore and continued strengthening the firm's capital and liquidity positions. Average total liquidity over the course of the quarter was $135 billion and we finished the quarter with $169 billion in total liquidity. The difficult market conditions and lower levels of client activity impacted our results, particularly in fixed income and asset management," Morgan Stanley CEO John Mack said in a statement. "The careful management of our capital, risk and liquidity leaves us well positioned to continue serving Morgan Stanley's clients and seize attractive risk-return opportunities as we see them." - Gerald Magpily

See Morgan Stanley press release
See Mercury News.com article

• banking
• credit crisis
• earnings
• Morgan Stanley
• restructuring
• subprime