A man enters the Morgan Stanley building Wednesday in New York. The No. 2 U.S. investment bank reported a fourth-quarter loss because of a $9.4 billion write-down from its exposure to subprime and other mortgage-related investments. - AP

Bailouts from overseas help

NEW YORK — By now, the formula has become familiar: A major U.S. financial firm turns to an overseas source for cash to bail it out of huge losses related to the subprime mortgage crisis.

Morgan Stanley, the No. 2 U.S. investment bank, on Wednesday reported a larger-than-expected fiscal fourth-quarter loss because of a $9.4 billion write-down from its exposure to subprime and other mortgage-related investments.

The company also said China's government-controlled investment vehicle has invested $5 billion to help replenish its capital. China Investment Corp., which also owns a stake in private-equity firm Blackstone Group LP, will control no more than 9.9 percent of Morgan Stanley once its investment converts to common shares in 2010.

Like Citigroup and Bear Stearns before it, Morgan Stanley appears to have found the allure of deep sovereign fund coffers too good to resist. But will these funds eventually exact a pound of flesh for their investment?

"Morgan Stanley may be taking a page out of the 1980s Wall Street playbook," said Boston University School of Law Professor Charles Whitehead, who spent 20 years in the banking industry. "However, there remains an open question about whether sovereign wealth funds raise issues unanticipated by earlier waves of purely private investors."

Throughout the 1980s, Japanese investors — armed with the strong yen — snapped up high-profile U.S. real estate deals like Rockefeller Center in New York City. This time around, foreign governments, flush with dollars from either trade surpluses or oil, are sponsoring even bigger investments in financial companies that could give them a more influential role on Wall Street.

In October, Bear Stearns Cos. agreed to a $1 billion investment from China's government-controlled Citic Securities Co. Citigroup Inc. received a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government last month.

Now Morgan Stanley joins the list as major global banks have lost $100 billion in the past six months. Talks between Morgan Stanley and China began during the summer, which is when the credit market turmoil began.

Those discussions accelerated when it became clear to the investment bank's leaders that big losses were on the horizon.

"The results are embarrassing for me, and our firm," Mack said on a conference call with analysts. "Ultimately, accountability for our results rests with me."

Mack aggressively expanded Morgan Stanley in the past year into the home loan industry, and trading in securities that support it. That strategy backfired, and Mack pinned the disappointing results on "isolated losses by a small trading team in part of the firm" whose members were fired.

Similarly large write-downs have already caused the ouster of Merrill Lynch & Co. CEO Stan O'Neal and Citigroup Inc. CEO Charles Prince. Last month, Morgan Stanley pushed out co-President Zoe Cruz in a broader shakeup of its top ranks.

Morgan Stanley said it lost $3.61 billion, or $3.61 per share in the fourth quarter, compared to a profit of $2.27 billion, or $1.44 per share, a year earlier. The investment house reported negative net revenue of $450 million because of the write-downs, compared to revenue of $7.75 billion a year ago.

Results broadly missed Wall Street projections for a loss of 39 cents per share on revenue of $4.23 billion, according to analysts polled by Thomson Financial.

"This quarter will put (Morgan Stanley) in a very precarious position as it relates to keeping clients and keeping employees," Wachovia Capital Markets analyst Douglas Sipkin said in a note to clients. "Further strategic initiatives under the current leadership will likely be scrutinized by investors considering the poorly timed push into the mortgage market at the end of 2006."

The results also led to warnings about potential downgrades from major rating agencies. Among them was Standard & Poor's, which said the "dismal fourth-quarter results heightened our concern regarding its strategic direction and risk appetite."

Mack, whose very leadership and strategy has been called into question, sounded a conciliatory tone during his conference call. He said management has learned a lesson, but that Morgan Stanley has no plan to back off.

"We're going to dial it back a little bit," he said about the firm's appetite for risk. "We've been sprinting, and we'll be jogging for a while, but we will still be in the market taking risk."

Morgan Stanley said it had about $1.8 billion worth of subprime mortgage exposure left on its books at the end of the quarter on Nov. 30, down from $10.4 billion at Aug. 31.

For the full year, Morgan Stanley's profit plunged 62 percent to $3.44 billion from $9.10 billion in 2006. Revenue fell 6 percent to $28.03 billion from $29.84 billion in 2006.

Despite the steep declines in the fourth quarter and full year, investors were encouraged by the latest capital injection into the financial industry, and Morgan Stanley shares closed up 4.2 percent at $50.08.

The equity units the Chinese fund purchased from Morgan Stanley will yield 9 percent per year before they are converted into common shares. The fund will have no special rights of ownership or any role in management of Morgan Stanley.

China Investment Corp. was launched in late September with $200 billion in capital, one-third of which was to be invested outside of China. It is one of the world's richest investment funds, making its U.S. debut earlier this year with the purchase of a stake in private equity powerhouse Blackstone Group.

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