Morgan Stanley has joined the ranks of Merrill Lynch and Citigroup in reporting billions of dollars in losses on subprime mortgage-related assets, which have declined in value as a result of continued market deterioration since August 2007.
One of the highest-ranked securities firms by value, Morgan Stanley said late Wednesday that it lost $3.7 billion for the two months ended Oct. 31 on securities related to mortgages given to borrowers with spotty credit histories.
The loss will cut fourth-quarter earnings by approximately $2.5 billion, the firm said, and warned that its exposures to losses related to subprime-related securities could continue into the quarter.
"It is expected that market conditions will continue to evolve, and that the fair value of these exposures will frequently change and could further deteriorate. Given these anticipated fluctuations, Morgan Stanley does not intend to update this information until it announces its fourth quarter 2007 earnings in December 2007," the company said in a statement.
Morgan Stanley's announcement follows similar news from other top securities firms and financial companies.
Citigroup Inc. CEO Charles Prince stepped down on Sunday after the banking company said it would lose $8 billion to $11 billion related to mortgage losses. (See Inman News story.)
Also, Citigroup executives are facing a shareholder lawsuit alleging that the company "recklessly spent billions of dollars purchasing subprime loans to be warehoused for future collateralized debt obligations," despite "the impending subprime mortgage crisis and increasing delinquency rates among subprime borrowers."
Citigroup said through a spokeswoman that the company believes "the lawsuit is without merit and will defend it vigorously," Bloomberg News reported.
Collateralized debt obligations, or CDOs, divide credit risk at different risk levels, called tranches, and serve as a funding vehicle for portfolio investments in fixed-income assets.
Prince's resignation came just days after Merrill Lynch & Co. announced the ouster of Chairman and CEO Stan O'Neal, and said it would suffer $8.4 billion in mortgage-related losses. The company had a $2.3 billion net loss in the third quarter.
Merrill Lynch also reported that the U.S. Securities and Exchange Commission has "initiated an inquiry into matters related to (the company's) subprime mortgage portfolio." The company is "cooperating fully" with the investigation, according to the earnings report.
And the company reported that a shareholder lawsuit was filed Nov. 1 alleging breach of fiduciary duty, corporate waste and abuse of control for Merrill Lynch's losses related to collateralized debt obligations, and also challenges alleged severance payment to O'Neal.
And another shareholder lawsuit, filed against the company on Oct. 30, charges that the company violated federal securities law in failing to properly disclose some information about its collateralized debt obligations.
Wall Street investors profited from mortgage-backed securities during the housing boom, but began to see problems as many of the securities -- especially those backed by subprime loans -- started defaulting or foreclosing.
In late 2006 and early 2007, many investors began noticing the deteriorating quality of mortgages they were holding onto in securities and started demanding lenders buy back swaths of bad loans. The result was a tightening of lending standards, which has restricted access to credit for many home buyers, especially those with spotty credit histories.
Write-downs of subprime-related assets at U.S. banks and brokerage firms may total $50 billion in the second half of 2007, according to a Bloomberg News report citing Deutsche Bank AG analyst Michael Mayo.
Meanwhile, Citigroup analyst Matt King said the losses could reach $64 billion, Bloomberg reported.