While other firms talk about the return to profitability and giving back TARP cash, Morgan Stanley (MS) has been quiet, but honest. It’s not on completely stable ground just yet.
Analysts expect the firm to post its second straight quarterly loss on April 20th.
Part of the problem, ironically, is the rebound in the trading value of its own corporate debt.
WSJ: The bonds, valued at about $29 billion recently, rallied as Morgan Stanley distanced itself from fears last fall that it was in dire straits. However, the gains forced the firm to increase the paper value of bonds it owes to investors. Since Morgan Stanley adjusts its marks on these bonds as if they were being bought back on the open market, the more expensive liability flows to its bottom line, hurting earnings.
While the hit reverses some of the gains Morgan Stanley got last year from the same securities, it could plunge the company into the red for the second quarter in a row. That hasn’t happened in the 23 years since the firm went public.
On the surface, this seems kind of silly, since the rebound in its corporate debt is a good sign — and it is. But then you’d also have to say that the company overstated earnings for Q4 when corporate debt dislocated to the extreme on the on the downside.
It’s also not the entirety, by any means, or Morgan Stanley’s problem. The company still owns a lot of real estate related assets that are likely to get marked down. And as we learned yesterday, the trading operations of the large firms aren’t yet back in the swing of things, having generally missed out on market gains in March.