Morgan Stanley's Quarterly Profit Fell 61%

Steep Slide Blamed On Credit Crisis

NEW YORK, June 18 -- Morgan Stanley on Wednesday said fallout from the credit crisis caused a 61 percent slide in quarterly profit, a decrease that would have been steeper if the investment bank hadn't sold about $1.4 billion of assets.

The nation's No. 2 investment bank used the sale of its Spanish wealth management unit and other assets to boost second-quarter profit to $1.01 billion (95 cents per share) after paying preferred dividends. That compares with $2.57 billion ($2.45) a year earlier. Revenue dropped 38 percent to $6.51 billion.

Analysts had expected a profit of 92 cents per share on revenue of $7.05 billion, according to Thomson Financial.

Morgan shares were up 0.25 percent Wednesday, finishing trading on the New York Stock Exchange at $40.69.

John Mack, chief executive of the New York investment house, said the market's dislocation and fallout from the credit crisis were to blame for the decline. Global banks and brokerages have written down nearly $300 billion from bets on mortgage-backed securities and other risky investments since last year.

"The difficult market conditions and lower levels of client activity impacted our results, particularly in fixed income and asset management," he said in a statement.

However, he pointed out that Morgan Stanley ended the quarter with $169 billion of total liquidity. Since the near-collapse of Bear Stearns in March, top Wall Street banks have been closely watched to determine whether they have enough free cash to cover further losses.

Morgan Stanley was able to make its numbers because it recorded a $698 million pretax gain from the sale of Spain's Morgan Stanley Wealth Management and a $732 million gain from the secondary offering of its MSCI.

Those one-time gains helped offset $436 million that Morgan Stanley lost in making mortgage-related trades, and $519 million of losses on leveraged loans. The investment bank also spent $245 million on severance after laying off some 3,000 workers since last year.

Chief Financial Officer Colm Kelleher said client flows were down during the quarter and that the decision was made to further clean up its balance sheet. For instance, the company's exposure to subprime mortgage-backed securities was cut to $300 million from $1.8 billion -- an amount that was as high as $10.8 billion in December.

"We really felt that this quarter was not for us to take risk in what we considered to be treacherous market conditions," he said in an interview. "We were focused on reducing our exposures, boosting liquidity and bringing down leverage."