By MICHAEL J. de la MERCED and KEITH BRADSHER
Published: December 19, 2007
Morgan Stanley posted its first quarterly loss ever on Wednesday after taking an additional $5.7 billion write-down related to subprime mortgages. The investment bank said it would sell a $5 billion stake to the China Investment Corporation, that country’s sovereign wealth fund, to shore up its capital.
Back Story With The Times’s Michael J. de la Merced (mp3)
The sale, which would give China about a 9.9 percent stake in one of Wall Street’s biggest investment banks, is the latest example of a foreign investor shoring up a Western financial firm in the wake of the housing meltdown.
Morgan Stanley’s $3.59 billion loss for the fourth quarter, or $3.61 a share, was a sharp drop from the $1.98 billion, or $1.87 a share, it earned in the period a year earlier. Analysts surveyed by Bloomberg News had expected a loss of 39 cents a share.
With the second write-down, Morgan Stanley has now lowered the value of its subprime holdings by $9.4 billion, one of the largest devaluations on Wall Street. In a statement, the bank’s chief executive, John J. Mack, said he took full responsibility and would forgo a bonus for 2007.
“The write-down Morgan Stanley took this quarter is deeply disappointing — to me, to our colleagues, to our board and to our shareholders,” he said. “Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I’ve told our compensation committee that I will not accept a bonus for 2007.”
That write-down took its toll on Morgan Stanley’s institutional securities business, which posted a pretax loss of $6.48 million, down from the $2.2 million it earned in the period a year earlier. Its net revenue was a loss of $3.4 billion compared with net revenue of $5.5 billion last year.
The brunt of that was absorbed by the firm’s fixed-income sales and trading business, which recorded a steep loss of $7.9 billion. That compares with the $2.3 billion in net revenue it earned last year, a stark illustration of how the firm’s aggressive move into the trading of mortgage-backed securities backfired as the housing markets declined.
Morgan Stanley’s drastic losses may heighten speculation about the fate of Mr. Mack, who returned to the firm in 2005 after the removal of his predecessor, Philip J. Purcell. One of Mr. Mack’s signature changes at the firm was to push it further into trading using its own capital, an effort to emulate its most profitable rival, Goldman Sachs. Goldman reported a modest gain in fourth-quarter profit on Tuesday.
Similar trading losses at Merrill Lynch and Citigroup led to the ouster of the chief executives at those firms and engendered talk about a similar move against Bear Stearns’s chief executive, James E. Cayne. Bear reports its fourth-quarter results on Thursday and is also expected to take a loss.
Mr. Mack has already reshuffled his bank’s management, most notably by firing Zoe Cruz, his heir apparent and the executive who managed Morgan Stanley’s trading operations.
Not all of Morgan Stanley’s news on Wednesday was negative. The firm’s global wealth management business reported net income of $378 million for the quarter, up 124 percent compared with figures in the period a year earlier. Its asset management unit’s income reported $294 million in net income for the quarter, a slight gain over last year.
And even its institutional securities unit had some bright spots. Morgan Stanley’s financial advisory business, including advising companies in mergers and acquisitions transactions, reported $779 million in revenue, a 30 percent increase owing to higher deal flow. However, that may fall off in the near future as tighter credit markets potentially hamper deal making.
The firm’s equity sales and trading revenues, as opposed to its debt trading, reported $2.5 billion in revenue, a 72 percent increase over the same time last year.
In taking a major investment by the China Investment Corporation, Morgan Stanley is following a model set by Citigroup and UBS, two other financial giants badly damaged by their exposure to securities backed by risky home loans. Citigroup sold a 4.9 percent stake to Abu Dhabi’s investment arm, while UBS sold stakes to the Singapore government and an unidentified Middle Eastern investor.
The stake taken by the investment firm will be passive and give no special rights to name directors, Morgan Stanley said in a statement. C.I.C. will purchase equity units that will be converted into common shares on Aug. 17, 2010, at prices between a still-undetermined reference price and a premium of 20 percent to that price. The units will pay a fixed annual rate of 9 percent on a quarterly basis.
“We are delighted to welcome C.I.C. as a long-term investor in Morgan Stanley and believe it is an important step in increasing the flow of capital between our countries and across these increasingly critical markets,” Mr. Mack said in the statement. “The investment from C.I.C. will help to strengthen our deep ties in these growth markets and ensure that Morgan Stanley has the resources necessary to pursue growth opportunities globally across our institutional securities, global wealth management and asset management businesses into 2008 and beyond.”
The deal marks an abrupt shift in strategy for the $200 billion China Investment Corporation and underlines the extent to which the government fund appears to be under the direct control of China’s leaders.
Lou Jiwei, the fund’s chairman, said in a speech at a financial forum on Nov. 29 that the fund sought liquidity and would mainly invest in financial instruments like index products. Mr. Li also said that the fund, which has fewer than two dozen employees, would start hiring foreign experts before making more overseas investments.
Officials knowledgeable about the fund also said that two-thirds of its money would be used to shore up China’s domestic banking industry, leaving only a third for overseas investments.
The investment fund declined to comment late Wednesday on its deal with Morgan Stanley. But a person close to the fund’s activities said that the decision to make the investment had been little expected by the fund’s staff.
The China Investment Corporation is under the control of China’s finance ministry, with some influence as well from the People’s Bank of China, the country’s central bank. There has been discussion in the Chinese government over whether even more foreign currency should be injected into the investment fund, as the People’s Bank of China continues to accumulate $1 billion a day as it buys up dollars to prevent the value of China’s currency from rising in international markets.
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News Releases
China Investment Corporation establishes Representative Office in TorontoJanuary 20, 2011: China Investment Corporation (CIC) opened its first overseas representative office - CIC Representative Office in Toroton, on January 20, 2011. CIC Toronto Office will serve as a platform for deepening the business cooperation and friendly relationship with local companies and for further exploring investment opportunities for CIC in Canada. CIC has appointed Mr. Felix Chee as Chief Representative of CIC Toronto Office. Mr. Chee previously served as Special Advisor to Chief Investment Officer of CIC.
China sovereign wealth fund opens first foreign office in Toronto
TORONTO, Jan. 20 (Xinhua) - China's sovereign wealth fund, China Investment Corporation (CIC), on Thursday inaugurated its first foreign representative office in this Canadian city.
The move comes as the fund tries to expand its international business operations. It opened a subsidiary in Hong Kong last November.
The Toronto office is aimed at enhancing long-term cooperation with business partners and exploring new areas and opportunities for investment in Canada, company chairman and chief executive officer Lou Jiwei said.
David Emerson, former Canadian trade and foreign affairs minister and advisor of CIC International Advisory Council, said the new Canadian presence showed the fund's commitment to strengthening partnership with Canada.
Felix Chee, chief representative officer in Toronto, said that the new office would further strengthen the fund's ties with Canada, facilitate potential investment opportunities, and develop a wider network of contacts with business, regulators and government agencies.
The fund was established in September 2007 as a wholly state-owned corporation with a registered capital of 200 billion U.S. dollars.
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China Investment Corporation Announces the Establishment of a Wholly-Owned Subsidiary in Hong KongNov. 7, 2010：China Investment Corporation (CIC) announces that it has established and registered a wholly-owned subsidiary in Hong Kong-CIC International (Hong Kong) Co., Limited. CIC will fully utilize Hong Kong’s position as an international financial centre as well as its world-class investment and financial services to develop and expand CIC’s investment activities outside the Mainland. CIC has appointed Professor Lawrence J. Lau to be the Chairman of CIC International (Hong Kong) Co., Limited. Prof. Lau has previously served as a Member of the International Advisory Council of CIC.
CIC was established in September 2007 as a wholly state-owned corporation in accordance with the Company Law of the People's Republic of China. Its registered capital is U.S.$ 200 billion. As the sovereign wealth fund of China, the objectives of CIC are to realise the diversification of the state’s foreign exchange assets and achieve a relatively high risk-adjusted long-term rate of return, through its investment activities outside the Mainland-principally portfolio investments with a small percentage of direct investments-operating entirely in accordance with commercial principles.
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