Following on from Swiss bank UBS’s big losses last week, Wall Street giant Morgan Stanley said on Wednesday that it has been forced to write down $9.4bn from its sub-prime mortgage investments. And it’s turned to China to re-fill its piggy bank: the China Investment Corporation, one of the state funds set up to invest the country’s huge cash pile, is ploughing in $5bn in exchange for a stake of about 10%.
It’s the second huge investment by CIC this year – it also spent $3bn buying a stake in private equity group Blackstone – and the latest example of the big banks looking east to bolster their balance sheet in the wake of the credit crunch. Citigroup sold a $7.5bn stake to the Abu Dhabi state fund, Bear Stearns agreed a deal with Chinese brokerage Citic that led to a £1bn cash injection, and last week Singaporean state fund GIC and an unnamed Middle Eastern investor poured £5.6bn into UBS. Barclays also brought China Development Bank and Temasek on board as strategic investors earlier this year.
Morgan Stanley’s fourth quarter numbers were shocking: its sub-prime losses ballooned by a further $5.7bn to $9.4bn; revenues were down from $7.85bn last year to minus $450m this year; and its $1.54bn profit in 2006 became a whopping $3.59bn loss this time round.
Chairman and CEO John Mack was suitably contrite today, saying the write-downs were ‘deeply disappointing’. He’s even taking the ultimate banker’s sacrifice: ‘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.’ Since he apparently took home about $40m last Christmas, that’s going to sting a bit – maybe he’ll have to leave that extra private jet until next year.
Mack, whose nickname is (naturally) ‘The Knife’, said he’d already ‘moved aggressively to make the necessary changes’ and asked for a bit of perspective: ‘These isolated losses by a small trading team in one part of the Firm should not overshadow the momentum we see in virtually all of our other businesses’.
Unfortunately, perspective tends to go out the window when you’ve just told your shareholders that you’ve managed to lose $10bn of their money...