Morgan Stanley said Wednesday that it is writing down $3.7 billion of subprime assets and expects the writedown to result in a cut of up to $2.5 billion in Q4 earnings. Analysts had been expecting a Q4 profit of $1.93 billion. The company's shares had shed 6% in regular trading on expectations of an even greater writedown and rebounded 1.6% to $52.00 in AH trading following the announcement. The writedown was the result of exposure to subprime assets that declined in value from $10.4 billion on August 31 to $6 billion on October 31. Morgan Stanley, Citigroup and Merrill Lynch have announced collective writedowns of $24 billion over the past month. "The dislocation in the market has been quite severe, liquidity has dried up," said Morgan Stanley CFO Colm Kelleher, who now estimates the credit markets will take three or four quarters to bounce back rather than the one or two he estimated on September 19, when Morgan Stanley reported Q3 results. Morgan Stanley spokeswoman Jeanmarie McFadden said the individuals responsible for the derivatives trading losses are no longer with the firm. Morgan Stanley's shares have fallen 24% in the past five trading days. In related news, insurance company American International Group posted a 27% drop in net income and a $2.68 billion after-tax writedown of assets in Q3. Its shares fell 6.7% to close at $57.90.
Commentary: Financial Sector Credit Default Swaps Surge on Writedown Fears • Financial Sector Write-Downs: Don't Be Seduced Into Holding the Bag • Morgan Stanley: VaR Datapoint of the Day • AIG Tops Forecasts, Not Worried About Mortgage Exposure
Stocks to watch: MS, AIG. Competitors: GS, MER, AZ, AXA. ETFs: IAI, KCE, IAK, KIE
Earnings call transcript: Morgan Stanley F3Q07, American International Group Q2 2007