Quarterly earnings at Morgan Stanley (MS) sunk a heavy 56% as falling institutional securities, declining investment-banking figures, and mounting trading losses hurt the second-largest U.S. investment bank.

Shares were down 6.48% in pre-market trading on news that income from continuing operations fell to $1.03 billion, or 95 cents a share, from $2.36 billion, or $2.45 a share, the year earlier.

Net revenue clocked in at $6.5 billion, a 38% drop from last year.

“Given the turbulent environment this quarter, we stayed close to shore and continued strengthening the Firm’s capital and liquidity positions,” John J. Mack, chairman and chief executive, said in a statement. “The difficult market conditions and lower levels of client activity impacted our results, particularly in fixed income and asset management.”

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And sadly, it could have been much worse. According to the statement, Morgan Stanley pulled in $1.43 billion pretax from a pair of divestures – $698 million from its Spanish wealth management business, and $732 million from the secondary offering of MSCI Inc. (MXB).

“If you have to go all the way to Spain to make numbers, it’s not good. How many more rabbits do they have in their hat? What’s going to be the driver of earnings growth going forward?” Matt McCormick, a stock analyst at Bahl & Gaynor Investment Counsel in Cincinnati, told Reuters.

Among its trading loss, Morgan Stanley was particularly hurt by its commodity plays, Colm Kelleher, the firm’s chief financial officer, told Bloomberg.

“We took a contrarian view on some positions in the energy sector and it didn’t work out for us,” Kelleher said. “Our traders, who have a very good track record on this, frankly got the timing wrong.”

Last month, Morgan Stanley announced plans to cut as much as 5% of its workforce. Since October, it has cut at least 3,000 jobs, Bloomberg reported.

The bank’s recent earnings fall in line with how it fared in the first quarter.

Last fiscal quarter (ended Feb. 29), Morgan Stanley’s quarterly revenue fell 17% to $8.3 billion. Income from continuing operations fell to $1.55 billion, or $1.45 a share. That’s down from $2.31 billion, or $2.17 a share, in the year-earlier period, but well above analysts’ expectations of $7.3 billion revenue and $1.03 a share.

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JPMorgan Chase & Co. (JPM) more than quadrupled its bid for troubled investment bank The Bear Stearns Cos. Inc. (BSC), from $278.5 million [$2.32 a share] to $1 billion [$10 a share]. News of the higher bid sent Bear Stearns shares up 115% by midday yesterday (Monday), before settling at $11.26, up 90% at the close for the day.

As insurance, JP Morgan also acquired a 39.5% stake in the beleaguered investment bank. Bear Stearns will issue 95 million new shares without seeking shareholder approval, the companies said.

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That means JP Morgan will need only 10% of shareholders to approve the takeover. Employees’ total stake will drop to about one fifth from one third once the company issues the new stock. The amount JP Morgan will pay for the stake was undisclosed.

"This will help the deal go through," George Ball, who leads brokerage firm Sanders Morris Harris Inc., told Bloomberg News. "The price is still catastrophically low, but it will change the attitude of people who stay at Bear. Those are the people [JPMorgan Chief Executive Officer James "Jamie" L. Dimon] needs to win over."

However, it is still possible for shareholders to pursue a lawsuit to block the deal on the grounds that the unorthodox board vote was an act of coercion.

Bear Stearns investors, many of who are at risk of losing their life savings, were outraged by the initial offer that valued the company at a mere one-fifteenth of its market price. According to a New York Times report, employees were seen crying in the hallways of the firm’s Manhattan headquarters.

British billionaire Joseph Lewis said last week that he would use every bit of leverage from his 8.4% stake in the crippled financial giant to block the deal. Lewis said his shareholder group would take "whatever action that they deem necessary and appropriate to protect the value of their investment in the shares," including lobbying Bear Stearns and third parties to consider another transaction.

Lewis and Bear Chairman James Cayne were allegedly courting other possible suitors with the hopes of securing a rival bid.

Sources close to the deal told the Times that the U.S. Federal Reserve, which brokered the emergency deal to prevent a collapse, directed JPMorgan to pay no more than $2 a share for Bear because it didn’t want the action to be perceived as an investor bailout.

In a television appearance on NBC’s "Today" show Treasury Secretary Henry Paulson, who was also involved in negotiations, portrayed the deal as a move to ensure stability in the financial markets rather than an outright rescue.

"Let me say that the Bear Stearns situation has been very painful for the Bear Stearns shareholders," Paulson said. "So I don’t think that they’ve been bailed out here."

JPMorgan was also lured back to the bargaining table after the company realized several "mistakes" had slipped through the original contract, including a sentence that would require JPMorgan to guarantee Bear Stearns’ trades even if shareholders voted down the deal.

One source told the Times that JPMorgan Chief Executive Officer James Dimon was "apoplectic" when the error was discovered, and reportedly made several fervent calls to the company’s lawyers.

As the possibility of the deal falling through became more likely, Dimon, who had previously threatened to "send Bear back into bankruptcy," was forced back into negotiations with Bear and the Federal Reserve, Friday.

Dimon was also said to have pleaded with rivals Morgan Stanley (MS) and Merrill Lynch & Co., Inc. (MER) to not recruit Bear employees during the volatile period of transition.

Dimon offered his empathy to Bear Stearns employees in a speech last week.

"No one on Wall Street could have anticipated this. I feel terrible sometimes when people think we took advantage. I don’t think we could possibly know what you all are feeling, but I hope that you give JPMorgan a chance," he said.

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Last week, Morgan Stanley (MS) began issuing two new exchange-traded notes (ETNs) that give exposure to the Indian Rupee and the Chinese Renminbi.

The Market Vectors-Chinese Renminbi/USD ETN (CNY) and Market Vectors-Indian Rupee/USD ETN (INR) will trade on the New York Stock Exchange. Van Eck Global will market the ETNs and Standard & Poor’s will calculate and maintain the underlying currency indices.

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Specifically, the Renminbi ETN seeks to track the performance of the S&P Chinese Renminbi Total Return Index. And the Rupee ETN seeks to track the performance of the S&P Indian Rupee Total Return Index.

Jeffrey Barany, Managing Director Structured Product Origination at Morgan Stanley, said the new ETNs represent "an exciting and groundbreaking opportunity for investors" seeking exposure to the Indian and Chinese currencies.

"Morgan Stanley’s considerable global reach and structured products expertise well positions us to deliver innovative products from a single multiple asset-class ETN platform," Barany said in a statement.

ETNs are senior, unsecured debt securities that deliver exposure to the exchange rate of a specific foreign currency. Investors may trade ETNs on an exchange at market price or receive a cash payment from the issuer based on the applicable index performance, less investor fees.

Previously, the main path for investors who wanted currency exposure was through Rydex’s line of CurrencyShares, ETF Trends reported.

Money Morning Investment Director Keith Fitz-Gerald said another "brand" issuer is similar to people’s preference for Coca-Cola or Pepsi.

"Both are simply offering variations of the same theme," Fitz-Gerald said. "As for which will have the better year, tough to say. Both markets could have a knee jerk reaction to the United States, but I wouldn’t bet against either right now"

Given the dollar’s doldrums and Asia’s rising economies, it wouldn’t be surprising if more financial firms rolled out similar currency ETNs.

Exchange-traded funds (ETFs) – a cousin of ETNs that tracks indices or a block of specific stocks – emerged in similar fashion. In 1993, Standard & Poor’s launched the first ETF, called S&P’s Depository Receipts (SPDRs).

Morgan Stanley (MS) soon entered the fray with its own ETFs, as did Barclays PLC (BCS) and The Vanguard Group Inc.

As of January, there were 1,173 ETFs listed on exchanges in the United States, Latin America, Europe, Asia, Australia and South Africa. A Middle East ETF is expected to launch later this year.

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Morgan Stanley’s (MS) first-quarter earnings plummeted, but stayed above analysts’ expectations, giving the Wall Street giant’s stock a slight boost in trading Wednesday (yesterday).

Morgan Stanley’s earnings followed in the footsteps of financial giants Goldman Sachs Group, Inc. (GS) and Lehman Bros. Holdings, Inc. (LEH) – awful compared with last year’s results, but fairly strong in the context of a global credit squeeze and a possible U.S. recession.

Quarterly revenue fell 17% to $8.3 billion. Income from continuing operations fell to $1.55 billion, or $1.45 a share, in the quarter ended Feb. 29. That’s down from $2.31 billion, or $2.17 a share, in the year-earlier period, but well above analysts’ expectations of $7.3 billion revenue and $1.03 a share.

"While many of our businesses are facing challenging market conditions that we expect to continue in the months ahead, we are satisfied with how Morgan Stanley navigated the ongoing market turbulence," Chief Executive Officer John J. Mack said in a statement.

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The firm’s trading branch, Institutional Securities, posted revenues of $6.2 billion and accounted for 75% of the bank’s net revenues and 96% of pre-tax income, its third-best quarter ever despite $2.3 in mortgage and loan losses and a chaotic market, The Wall Street Journal reported.

"These have been unprecedented markets in terms of the falloff in liquidity and funding," Morgan Stanley Chief Financial Officer Colm Kelleher told the Journal. "In light of that, I think that these are pretty good results."

Morgan Stanley also announced the appointment of Ken deRegt as the firm’s new Chief Risk Officer.

Financials Rallying

The collapse of The Bear Stearns Cos. Inc. (BSC) started a chain reaction of sell-offs as panicked investors began to speculate about another high profile collapse.  Shares of Lehman Brothers Holdings Inc. (LEH) took the biggest hit tumbling 19% to close at $31.75 apiece Monday after sinking as low as $20.25 earlier in the day.

The financial sector has posted a strong rally since then, as stronger-than-expected earnings and a 75-basis-point cut to the key Federal Funds rate from 3% to 2.25% [the sixth cut in seven months] restored some investor confidence.

Since Tuesday, however, several top-tier financials have seen their stocks soar:

• Morgan Stanley: up 9.86%
• Goldman Sachs: up 6.14%
• Lehman Bros.: up 14.39%
• JP Morgan Chase & Co. (JPM): up 16.23%
• Bank of America Corp. (BAC): up 8.04%
• Wachovia Corp. (WB): up 6.62%

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Morgan Stanley (MS) announced a total fourth quarter loss of $9.4 billion yesterday (Wednesday), after the company took another $5.7 billion write down on its mortgage-related assets. The same day, Morgan Stanley also announced a $5 billion cash infusion from state-controlled China Investment Corp.

The second-largest U.S. investment bank posted a net loss from continuing operations of $3.59 billion, or $3.61 per share, in the quarter ended Nov. 30.  In a statement, Chief Executive Officer John Mack said the loss was "deeply disappointing."  Mack also announced he would refuse an annual bonus this year.

In 2006, he received a $40 million bonus for his efforts. Then again, in 2006, Morgan Stanley posted $1.98 billion net income for the fourth quarter. This year has been a different story, as the company’s strategy of expanding into mortgages and making bigger trading bets has backfired. Losses from securities related to home loans more than doubled in November.

"Our assumptions included, what at the time, was deemed to be a worst-case scenario," Colm Kelleher, chief financial officer at Morgan Stanley, told Bloomberg News. "History has proven that that worst-case scenario was not the worst case."

Co-President Zoe Cruz, who oversaw the fixed income unit responsible for the mortgage trades, was ousted as a result of the company’s costly misstep. Morgan Stanley also said in October, that it would eliminate 900,000 jobs concentrated mostly in its once profitable mortgage units.

China Investment Corp., China’s sovereign wealth fund, has seized the opportunity, by offering Morgan Stanley a much needed $5 billion cash infusion. That will raise its stake in the beleaguered financial giant to 9.9%, making it the company’s second largest shareholder.

Similar deals have occurred throughout the financial sector in this turbulent time.  Citigroup (C) sold a 5% stake to an Abu Dhabi fund for $7.5 billion. UBS (UBS) received an $11.5 billion cash injection from Singapore in exchange for 9% of its equity. And Bear Stearns (BSC) sold a 6% stake to China’s government-controlled Citic Securities Co. for $1 billion in October.

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Morgan Stanley (MS) and China Fortune Securities are planning to form an investment joint venture in China, opening up a potentially massive revenue stream in the world’s fastest growing market for the New York-based lender, sources told Reuters.

Senior representatives of both companies are finalizing details of the operation including the amount of start-up capital required and compensation of the board, the sources said.

China Fortune Securities is among the country’s oldest brokers. And China’s fast-growing middle class is flocking to banks to finance mortgages.

Morgan Stanley already owns 34% of China’s leading securities firm, China International Capital Corp. – an investment that began in 1995. But its holdings in CICC don’t enable Morgan Stanley much control over its direction.

With its China Fortune Securities venture, Morgan Stanley wants a piece of management control. That’s an ambitious quest for Morgan Stanley, and should it fail, the company should be thankful for what it already has.

The Chinese government has restricted which lenders and securities firms its domestic companies are allowed to partner with. Two years ago, the government disallowed foreign banks access to the country’s securities sector.

However, the U.S. banking market isn’t nearly as gargantuan as it was two years ago, as the subprime mortgage fallout caused many U.S. lenders to report double-digit profit losses in the third quarter. Sensing opportunity (or weakness), many foreign companies and governments bought substantial stakes in U.S. banks.

Those behind-the-scenes diplomatic ties, in addition to the bank’s smaller market shares, may convince China’s government that U.S. banks operating in mainland China aren’t as much as a threat as they were two years ago.

Because of and/or in spite of those happenings, U.S. Treasury Secretary Henry Paulson will hold economic talks with Chinese officials. 

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