Just Because You Haven’t Heard About Them, It Does Not Mean Troubles May Be Lurking

We have heard a lot recently about Citigroup and Merrill Lynch. Are these the only companies with problems or did they just decide to come clean first. What do you think? By the way, we are not picking on Morgan Stanley here, it is just the article was about them. Estimates for losses for other investment banks in Q4, is given at the end of the post. Text in bold is my emphasis. From the WSJ:

Of all the blue-chip Wall Street securities firms, Morgan Stanley seemed one of the least likely to get thumped by the subprime- mortgage crisis. . . .

. . . . Two analysts are projecting the firm may take a fourth-quarter write-down of $3 billion to $6 billion. The estimates by analysts David Trone of Fox-Pitt, Kelton and Mike Mayo of Deutsche Bank AG contributed to Morgan Stanley stock's falling $1.08, or 1.94%, yesterday in New York Stock Exchange trading to $54.51 a share. Mr. Trone projected the possible write-downs at $4 billion to $6 billion, Mr. Mayo $3 billion to $4 billion.

While the firm may not have underwritten as many CDOs, which are securities backed by pools of assets such as mortgages, Morgan Stanley may have been involved in transactions with other firms that left it with exposure to CDO risks, market participants say.

Such proprietary trading with the firm's own money already cost the firm $480 million on money-losing quantitative stock trading in the third quarter, with $390 million in losses occurring on a single day in August, according to regulatory filings.

Asked by a CNBC reporter Monday about possible fourth-quarter write-downs, Morgan Stanley Chief Executive John Mack indicated he expected numerous firms would report such hits because market prices have declined. But he wouldn't address specifics about Morgan Stanley.

But the estimates indicate the pain from such losses may be spreading to other Wall Street firms, which in mid-December will report their results for the fourth quarter ending this month. "Anything that touches CDOs is showing more pain than we thought," Mr. Mayo said.

"At first the market assumed mortgage was affecting only a few poor risk managers, and now they're realizing it's going to affect almost every large investment bank," Mr. Trone said in an interview.

Morgan Stanley, Lehman Brothers Holdings, Bear Stearns, and Goldman Sachs Group all gave their last earnings report in mid-September based on the quarters that ended in August. Both Citigroup and Merrill reported for periods including September, when the debt market downturn worsened, as it has in October as well. . . . .

. . . . . For its third quarter ended in August, Morgan Stanley reported $940 million in write-downs for buyout-financing commitments, $480 million in quantitative stock-trading losses and a $1 billion drop-off in bond revenue reflecting losses in mortgage-related securities.

Mr. Trone characterized the basis for his Morgan Stanley estimate as "educated guesses" tied to the firm's disclosed levels of credit and real-estate exposure. He estimated the firm's exposure to CDOs is about $16 billion and that the write-downs are likely to total 25% of its CDO exposures, or $4 billion. He said the firm could take an additional $2 billion hit on straight mortgages and other risks such as exposure to SIVs, or structured investment vehicles.

Another research firm, CreditSights, yesterday estimated potential fourth-quarter CDO hits at $9.4 billion for Merrill, $5.1 billion for Goldman, $3.9 billion for Lehman, $3.8 billion for Morgan Stanley and $3.2 billion for Bear Stearns.