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Update: MS conference call transcript is up.

Morgan Stanley's Q3 earnings back in September were bad. "Mack Smacked" was the Portfolio headline, reacting to a lower profit (just $1.54 billion, John Mack's first quarterly earnings decline) and a nasty $940 million write-down on bad loans.

Ah, those were the days. Just look at the Q4 results: an eye-popping $3.56 billion loss, and an even more enormous $9.4 billion write-down on bad mortgages. Many on Wall Street suspected Morgan Stanley's earnings might be bad, but this is literally an order of magnitude worse than expectations:

The loss of $3.61 a share in the three months ended Nov. 30 compares with net income of $1.98 billion, or $1.87 a year earlier. Analysts were estimating a loss of 39 cents, according to a survey by Bloomberg.

I have to say I'm quite flabbergasted at the size of the write-down. Morgan Stanley's meant to be an investment bank, ferchrissakes, not a lender or a bond investor. It has no business holding that sort of quantity of mortgage-backed bonds on its books. And indeed its pure investment-banking business seems to be doing rather well:

Morgan Stanley ranks second after Goldman among the world's biggest advisers on mergers and acquisitions announced in 2007, data compiled by Bloomberg show. The firm advised on $42.2 billion of takeovers completed during the fiscal fourth quarter, more than double a year earlier.
In equity underwriting, Morgan Stanley managed $14.1 billion of offerings during the quarter, up from $13.6 billion a year earlier, Bloomberg data show.

John Mack, like Jimmy Cayne, is foregoing his bonus for the year, which is quite right too. He didn't leak the news to the WSJ in advance, maybe because he didn't see the point in drawing attention to it. Both Mack and Cayne must now be considered on deathwatch – the Morgan Stanley buck stops with Mack, remember, not with the ousted Zoe Cruz.

Oh, and did I mention? Morgan Stanley is also selling 10% of itself to China Investment Corp. A lean and mean investment bank, like Morgan Stanley considers itself, clearly can't weather a $9 billion write-down without raising new capital to cover it, so it's good that these two announcements were made simultaneously.

That said, however, I wouldn't be at all surprised to hear that Carol Loomis was now looking into Morgan Stanley in much the same manner in which she investigated Citigroup last month. Morgan Stanley would seem to have had a pretty clear notion of the magnitude of these losses back in November, when it fired Cruz. If that's true, Morgan Stanley was sitting on this material information for a good three weeks. Which would not look good.