Sting in the tail

8 November 2007 By Antony Currie Follow @AntonyMCurrie

Morgan Stanley s bankers dodged the mortgage problems that beset Citi and Merrill, but its prop traders let the side down when their short positions went wrong. Add that to quant and leveraged loan losses last quarter, and Mack s charge to catch Goldman looks to have backfired.

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Morgan Stanley revealed that the declining value of its subprime mortgage and CDO positions since the end of its third quarter has cost the firm $3.7bn in revenue and $2.5bn in earnings. The investment bank's fourth quarter closes at the end of November.

Morgan's loss stems not from holding onto supersenior tranches of CDOs that it had underwritten, but from its prop trading desk. Last December its traders put on a structural short position on subprimebacked CDOs. But in recent months market loss expectations exceeded those assumed in the trade, and effectively turned the short position into a long one.

Morgan also revealed that its maximum loss from subprime mortgages and CDOs after the writedown is $6bn.

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