The Sunny Side of Morgan Stanley's Earnings

Morgan Stanley's stock price might be down today in the wake of disappointing earnings, but I don't think that these results really counteract the relatively good news from Lehman brothers yesterday, and I still have that weirdly good feeling I started getting after the rate cut yesterday.

Morgan Stanley is mainly a victim of Really Bad Timing on the part of John Mack, its CEO: he jumped feet-first into the risk pool just as all the liquidity was draining out of it, with painful and predictable consequences. The bank used a lot of its own capital to underwrite very large loans, which meant that it ended up having to write off $940 million after it couldn't sell those loans to anybody else. What's more, Morgan Stanley, like Goldman Sachs, behaves sometimes like a big quantitative hedge fund, and those strategies cost it another $480 million thanks to the quant bloodbath over the past couple of months.

On the other hand, investment banking revenues grew by a very impressive 45% to $1.4 billion, and asset-management fees increased 61% to $1.36 billion. Obviously, those growth rates aren't sustainable in the wake of a credit crunch. But Morgan Stanley remains a golden franchise which should be able to find its way back into the market's good graces without too much difficulty: after all, this is the first time that Mack has disappointed.