I have to confess that when my alma mater Morgan Stanley announces earnings, it still tugs at the heart strings. We endlessly outperformed expectations, but laughed because we knew there were tons of latent profits sitting on the back books. The stock would rocket to trade at a luxurious five times book. We were the invincible Masters of the Universe.
Things have changed a little bit since the eighties. Today the company said it lost $190 million in Q1, and that revenues plunged from $7.92 billion to $3.04 billion. The dividend was cut 82 percent to a paltry five cents a share, and the stock backed off 9 percent. Those coupon clipping retired Morgan MD’s have got to be pissed. I have to confess that “risk adjusted returns” is a term that is new to me when applied to corporate earnings. The venerable white shoe company disclosed so many special one-time-only provisions it almost earned a place in the Guinness Book of Records. Bizarrely, it lost money on marks because its own debt is trading higher than three months ago, wiping out unrealized gains on the theoretical short. Mark to market can be a bitch. Guess what? Lower risk taking means fewer profits. Thank goodness I’m not there anymore, now that the salad days are a distant memory. CEO John Mack is probably wishing he stayed at hedge fund Pequot Capital. But if you had to name two firms that are going to survive this mess they are Morgan Stanley and Goldman Sachs.
They are, after all, still the smartest people in the room. Do I need to point out that the stock is up 430% from the October low?
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