Morgan Stanley revealed late Wednesday that it would take a $3.7 billion charge for non-performing assets tied to mortgage-related positions.
As a result, fourth quarter net income for the second largest U.S. brokerage firm could be reduced by $2.5 billion, though the loss could grow between now and the end of November.
Interestingly, the $3.7 billion loss is believed to be the result of one speculative trade that went badly awry.
Though Morgan Stanley wasn’t big into collateralized debt obligations (CDO’s), one bet late last year that predicted mortgage-related securities would fall hit the firm hard after a profitable short position soon became a deeply troubled long position.
The firm had predicted that mortgage-related securities would fall, but after they plummeted unexpectedly in September and October, the position was no longer profitable, and in fact quite the opposite.
The loss was a huge surprise to analysts who believed that the firm’s low rank as an underwriter of CDO’s would help them avoid a major write-down, and led many to question why such an aggressive CDO-related trade would be pursued to begin with.
On a positive note, Morgan Stanley said it had scaled back its net subprime exposure from $10.4 billion to $6 billion.
The loss is the latest in a string to hit the major investment banks, but pales in comparison to recent write-downs of $6.1 billion at Citi and $8.9 billion at Merrill Lynch.
Shares of Morgan Stanley, which fell $3.32, or 6 percent, to $51.19 in regular session trading Wednesday, rose 81 cents to $52 in after-hours trading on the news.