Aug. 11 (Bloomberg) -- Morgan Stanley had its long-term credit rating lowered by Moody's Investors Service, which cited the second-biggest U.S. securities firm's failed risk-management practices.

Morgan Stanley's debt was downgraded one level to A1 from Aa3, Moody's said in a statement today. Both firms are based in New York. A1 is the fifth-highest investment-grade rating.

``Performance of the company over the past year has shown that the risk controls haven't worked,'' said Peter Nerby, an analyst at Moody's. ``The firm has said it's making changes to the risk management systems.''

Morgan Stanley lost its AA rating from Standard & Poor's on June 2, when the credit rating was reduced by one level to A+. Morgan Stanley is still ranked one grade above Merrill Lynch & Co. and Lehman Brothers Holdings Inc., which had their ratings cut in recent months due to mortgage-market writedowns.

Morgan Stanley has recorded $14.4 billion of writedowns on its mortgage-related portfolio since the third quarter of last year. Merrill's writedowns have exceeded $46 billion.

Moody's said Morgan Stanley's rating would be cut further if the firm lost an additional $7 billion on its mortgage assets.

Following the downgrade today, credit-default swaps tied to Morgan Stanley climbed 7 basis points to 210 basis points as of 4:26 p.m. in New York, according to broker Phoenix Partners Group. The company's shares fell as much as 2.4 percent to $44.32 in after-hours trading.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: August 11, 2008 18:18 EDT