Asset write-downs may wipe out securities firm’s fourth-quarter gain
NEW YORK – MORGAN Stanley joined Merrill Lynch and Citigroup in booking losses on sub-prime mortgage-related assets, and said the outlook for credit markets is bleaker now than it was in September.
The firm said it lost US$3.7 billion (S$5.3 billion) in the two months ended Oct 31 after prices for securities linked to home loans made to risky borrowers sank further than its traders had expected.
These losses cut fourth-quarter earnings at the country’s second-largest securities firm by US$2.5 billion, although the firm said the figure might change by the month’s end.
Merrill Lynch, the country’s third-largest securities firm, and Citigroup, its biggest bank, have also reported deteriorations in the value of their mortgage holdings since the end of August.
Morgan Stanley chief financial officer Colm Kelleher said he now expects credit markets to take three to four quarters to recover.
‘The healing process will take longer,’ he said. ‘The dislocation in the market has been quite severe; liquidity has dried up.’
Concerns about potential write-downs at Morgan Stanley have pushed the stock lower this week, bringing the year-to-date decline to 24 per cent. The shares fell 6.9 per cent to US$51.19 in New York Stock Exchange composite trading on Wednesday.
Citigroup and Merrill have both seen their shares fall by more than 40 per cent this year.
Morgan Stanley’s asset write-downs could wipe out its fourth-quarter profit. It was expected to earn US$1.93 billion for the period, according to the average estimate of 10 analysts surveyed by Bloomberg.
Write-downs of sub-prime related assets at US banks and brokerages could add up to US$50 billion in the second half, Deutsche Bank analyst Michael Mayo estimated before Morgan Stanley’s announcement.
Citigroup analyst Matt King said the figure might reach US$64 billion.
Morgan Stanley’s maximum potential losses from sub-prime related assets stood at US$6 billion at the end of last month, down from US$10.4 billion at end-August, the firm said.
That ‘net exposure’ figure assumes that all of the securities default and no money is recovered on any of them.
The firm said it does not plan to release more information about the exposures until it reports fourth-quarter results next month.
Except for the losses that will affect its fixed-income division, the firm said it ‘expects to deliver solid results in each of its other businesses’.
Source: BLOOMBERG NEWS (The Straits Times 9 Nov 07)
