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Trading Unit Propels Morgan Stanley

Scorpio

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Trading Unit Propels Morgan Stanley

By MICHAEL J. de la MERCED
Published: April 21, 2010

Morgan Stanley reported a $1.8 billion profit on Wednesday, bolstered by trading gains as the firm continued to rebuild from its near-death experience during the financial crisis.


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Richard Drew/Associated Press

The Morgan Stanley building in New York. The investment bank is seeking to rebuild its trading unit, which fueled first-quarter results.

All of Morgan Stanley’s businesses improved in the three months ended March 31, from its core investment banking operations to its expanding wealth management division, a unit the firm is counting on to help provide growth.

In a welcome development for the firm, much of the first-quarter profit arose out of its trading division, which suffered big losses during the credit crisis. The unit, which posted $4.1 billion in revenue for the quarter, has been slower to recover than those at rival firms.

“Our intense focus on disciplined execution across Morgan Stanley’s global franchise helped the firm deliver improved results this quarter, though we still have a great deal of work to do,†James P. Gorman, Morgan Stanley’s chief executive, said in a statement.

Morgan Stanley’s results follow largely rosy results from competitors like Goldman Sachs, JPMorgan Chase and Bank of America, all of which drew much of their growing profits from their trading divisions.

Even Citigroup, whose financial recovery has trailed those of its rivals, reported better-than-expected results this week. Citigroup reported a profit of $4.4 billion; Bank of America earned $4.2 billion; Goldman Sachs, $3.46 billion; and JPMorgan, $3.3 billion.

Morgan Stanley’s profit, built on $9.1 billion in revenue, amounted to 99 cents a diluted share. Analysts surveyed by Thomson Reuters had expected the firm to earn about 57 cents.

Shares in Morgan Stanley rose more than 3 percent in midmorning trading on Wednesday, to $31.45. The stock has risen 6.3 percent this year, though it and other banks’ suffered late last week after the Securities and Exchange Commission sued Goldman on accusations of securities fraud.

Since taking over as chief executive this year, Mr. Gorman, who previously oversaw Morgan Stanley’s wealth management unit, has pushed to reduce the firm’s overall risk levels.

For most of 2009, Morgan Stanley has sought to recover from the series of missteps that nearly sank the firm during the financial crisis, including large losses at its trading unit. Its tamping down on risky bets also cost the firm some of the profits its competitors reaped in the early part of the year, and it did not turn a profit until the third quarter last year.

Nor Morgan Stanley is seeking to shore up its core institutional securities unit, including by hiring new traders to help keep pace with Goldman, JPMorgan and others. Executives have sought to hire up to 400 traders worldwide, a program that was meant to have reached full speed by the first quarter.

That appears to have paid off this quarter: the institutional securities unit swung to a $2.1 billion gain in pretax income from continuing operations, from a $464 million loss last year. Fixed-income trading revenue more than doubled to $2.7 billion.

Despite a continued uptick in mergers activity, Morgan Stanley’s business reported a 20 percent decline in advisory revenue from the same period a year ago, to $327 million. The firm cited a decrease in large deal transactions for the quarter.

Morgan Stanley’s global wealth management business more than doubled its pretax income from continuing operations at $278 million. The firm benefited from the merger of its wealth management unit with Citigroup’s Smith Barney last spring. Morgan Stanley is expected to eventually take over the joint venture, as part of its effort to rely on more stable operations.

The firm also saw a drastic improvement in its asset management business, earning $173 million for the quarter.

Still, Morgan Stanley suffered some hits, including a $932 million loss on an investment in the Revel Entertainment Group, a casino development subsidiary that the firm plans to sell. The firm acknowledged that one of its funds is in restructuring negotiations with lenders, though it added that it is not obligated to support the fund.

It also recorded a $775 million gain related to a settlement with Discover Financial Services, the credit card issuer.

http://www.nytimes.com/2010/04/22/business/22morgan.html?partner=rss&emc=rss
 

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#2

Banks trade their way to profit; loan losses ease

AP

By STEPHEN BERNARD, AP Business Writer Stephen Bernard, Ap Business Writer – 32 mins ago

NEW YORK – The nation's big banks have found the key to success while they wait for the economy to recover: aggressive trading of investments including bonds, currencies and commodities.

But they may also be heading toward making money on loans again. The big banks that have released earnings over the past week all reported improvements in their consumer loan portfolios.

Banking executives had been conservative about their views on the economy and predicting a peak in losses from failed loans. Now they are saying mortgage and credit card defaults are declining.

A drop in loan defaults and the amount of money set aside for future loan losses is among the clearest signs that the economy is recovering, albeit slowly, from a recession. It means customers are better able to repay debt. It gives hope to financial institutions that have lost billions of dollars on soured loans.

Wells Fargo & Co. said Wednesday it has "turned the corner" with its credit problems. The bank reported earnings of $2.37 billion, or 45 cents per share. It set aside $5.3 billion to cover bad loans during the quarter, down 9.9 percent from $5.9 billion in the previous quarter.

Wells Fargo Chief Credit and Risk Officer Mike Loughlin said in a statement the bank believes "quarterly total credit losses have peaked."

The San Francisco-based bank was ahead in front of its peers, declaring after the fourth quarter that the economy is healing. But a drop in losses from loans in the first quarter certainly helped Wells Fargo and other big banks beat analysts' earnings forecasts.

Jamie Cox, managing partner at Harris Financial Group, said, "If you can get loan losses to decline, that will magnify earnings."

Profits could jump as fast as they fell when the recession and credit crisis hit in loan-loss reserves shrink, Cox said.

Even JPMorgan Chase & Co. CEO Jamie Dimon was more optimistic than he had been in the past. He told investors that JPMorgan "continued to see delinquencies stabilize, and in some cases improve."

JPMorgan Chase earned $3.3 billion, or 74 cents per share. Its non-performing loans, those that are in default or close to being in default, totaled $2.7 billion, down $763 million from the previous quarter.

Not all analysts are convinced, though, that loan losses are permanently on the downswing.

Banks have done a good job setting aside money to cover losses, "but I think it's still too early to say we're turning a corner," said Paul Miller, head of financial institutions research at FBR Capital Markets.

Until that time though, many big banks have relied on other ways of earning money, particularly their trading operations. Banks like JPMorgan Chase, Citigroup Inc. and Bank of America Corp. were able capitalize on improved markets to go along with modest improvements in lending operations.

Goldman Sachs Group Inc. and Morgan Stanley, which don't have the consumer retail businesses that other companies have, also generated much of their revenue and profit from trading.

Morgan Stanley said Wednesday it earned $1.41 billion, or 99 cents per share. The investment bank, which was criticized last year for being too conservative as markets recovered, saw its revenue from trading almost triple to $4.1 billion from a year earlier.

However, trading can be a fickle business. Banks have been profiting in recent quarters from continuing low interest rates that allow them to borrow money cheaply and put it into higher-yielding investments such as stocks and corporate bonds. If rates go up, it won't be so easy for them to make so much money.

Still, the Federal Reserve has repeatedly said it plans to keep interest rates low to sustain economic growth.

FBR's Miller said trading profits should remain strong while the Fed maintains its current strategy.

"It's not sustainable in the long run, but for now will help them earn through the crisis," Miller said.

In order to continue to beat expectations, banks' optimism over dwindling loan losses must come true. They will need them to offset the eventual slowdown in trading profits.

http://news.yahoo.com/s/ap/20100421/ap_on_bi_ge/us_earns_banks
 

Argent Dragon

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"It's not sustainable in the long run, but for now will help them earn through the crisis," Miller said.
I suppose it's sustainable just long enough to suck more investors "IN" before the next crash so they can have even Bigger bonus' by x-mas.
 

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If you ignore your bad loans and losses and trade with insider information you should be making a lot of money.
 

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"If US authorities were to require banks to mark their commercial real estate loans to market
today, lending to this sector would be extinguished, triggering a chain of bankruptcies as
borrowers became unable to roll over their debt."


Richard Koo - Nomura Securities Co Ltd, Tokyo

http://www.zerohedge.com/sites/default/files/Koo April 20.pdf