Nov. 6 (Bloomberg) -- Morgan Stanley may be the next big Wall Street firm to post losses on mortgage-related securities, writing down their value by as much as $6 billion, said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller.

Trone cut his recommendation on Morgan Stanley, the second- biggest U.S. securities firm, to ``in line'' from ``outperform'' today because he expects the company to lose about $4 billion on asset-backed securities and collateralized debt obligations. The remaining losses may be booked on residual mortgage interest and on credit lines to structured investment vehicles, Trone said.

``We suggest an outright avoidance until either management discloses more specific exposure data and it proves smaller than we thought, or they actually take writedowns big enough to get beyond this,'' Trone wrote in a note to clients.

Morgan Stanley's competitors including Merrill Lynch & Co., the third-largest securities firm, and Citigroup Inc., the biggest U.S. bank, have announced writedowns after revising the value of mortgages or bonds backed by loans. The companies are getting stuck with losses after a surge in U.S. mortgage defaults lowered the value of the securities.

Mark Lake, a spokesman at Morgan Stanley in New York, declined to comment today on Trone's note.

Morgan Stanley fell $1.08, or 1.9 percent to $54.51 at 4:15 p.m. in New York Stock Exchange composite trading. Earlier in the session, the stock dropped as low as $52.82, a 52-week-low. The New York-based company's stock has declined 19 percent this year, compared with a 10 percent drop in the 12-member Amex Securities/Broker Dealer Index.

Saxon Capital

Morgan Stanley under Chief Executive Officer John Mackacquired Saxon Capital Inc. for $705 million in December. In addition to being a mortgage provider, Saxon services home loans to people with poor credit histories by collecting payments, maintaining records and foreclosing on delinquent borrowers.

Last month Morgan Stanley said it would eliminate about 900 jobs, including 600 from units that make home loans, after third- quarter fixed-income revenue fell 3 percent. While Mack got higher revenue from equities, investment banking and money management, those units failed to offset a slump in fixed income and $877 million in writedowns on leveraged loans.

Residual mortgage interests are rights to payments from mortgages packaged into bonds that aren't owed to holders of the securities. Structured Investment Vehicles or SIVs sell commercial paper to buy longer term assets such as mortgage or bank bonds.

Merrill Writedown

Merrill ousted CEO Stan O'Neal on Oct. 30 after posting a $2.24 billion third-quarter loss that included an $8.4 billion writedown for subprime mortgages, asset-backed bonds and loans gone bad. In December, O'Neal paid $1.3 billion for mortgage lender First Franklin Financial Corp., the 10th-largest originator of subprime mortgages, just as the business was souring.

Merrill is the third-biggest U.S. securities firm after Goldman Sachs Group Inc. and Morgan Stanley.

Citigroup wrote off more than $6 billion of subprime mortgage assets, loans and other securities in the third quarter, contributing to a 60 percent decline in net income from a year earlier. On Nov. 4, Citigroup said CEO Charles Prince was stepping down and warned of as much as $11 billion of additional writedowns.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: November 6, 2007 17:08 EST