Morgan Stanley's fourth quarter wasn't as bad as it was last year, but it still wasn't good enough to please Wall Street.

The bank narrowed its loss for the quarter to $2.3 billion from $3.6 billion, but the $2.34 per share loss was much wider than the 34-cent loss analysts expected. Still, it was able to report net income for the full year of $1.7 billion.

Making matters worse, Moody's downgraded Morgan's senior debt rating by one notch, citing the bank's fourth-quarter loss and the overall economic outlook.

Looking forward, the firm expects to realize $2 billion in cost savings from its previously announced headcount reduction. It also said it hired two senior executives from Wachovia to help launch its retail banking group. Earlier this year, Goldman Sachs and Morgan Stanley registered as bank holding companies and are now working on attracting the requisite amount of deposits under new regulations.

"The environment will continue to be challenging," said chief executive John Mack in a statement. "But we have successfully evolved and adapted our business across numerous cycles, and the current market dislocation gives us openings—including through our strategic alliance with Mitsubishi UFJ—to build market share, seize new opportunities, and ultimately deliver long-term value to our shareholders."

Mack is forgoing a bonus for the second consecutive year.

Morgan's results were particularly hit hard by the decline in investment banking activity, including M&A advisory and underwriting businesses. Its asset management arm also suffered a blow by the declining global markets. Most of the previously announced headcount reduction will come out of these divisions.

Shares in Morgan Stanley fell 4 percent in morning trading.