Morgan Stanley Traders Lost Money on 31 Days Last Quarter

Morgan Stanley (MS), owner of the world’s biggest brokerage, posted trading losses on 31 days in the third quarter, the most since 2008 as markets fell amid concern that Europe’s debt crisis may spread.

Traders generated at least $100 million on two days, the fewest in a year, the New York-based company said yesterday in a quarterly filing. Three of the daily losses exceeded the firm’s value-at-risk, or VaR, the maximum amount Morgan Stanley estimates it could lose from trading on 95 percent of days.

Morgan Stanley said last month that third-quarter trading revenue dropped 34 percent from the second quarter, excluding accounting gains known as debt-valuation adjustments, or DVA. The company logged three days of losses in the first quarter of 2011 and eight days in the subsequent three-month period.

JPMorgan Chase & Co. (JPM), the biggest U.S. bank by assets, said last week that its traders posted losses on 16 days in the third quarter, while Bank of America Corp. reported trading losses on 20 days and its largest single-day loss since 2008. Both banks had perfect trading quarters in the first three months of 2011.

Losses tied to monoline insurers reduced third-quarter trading revenue by $284 million, according to the filing. Morgan Stanley’s derivatives counterparty exposure to MBIA Inc. and other bond insurers was $2.1 billion on Sept. 30, up from $1.6 billion on June 30. About $2 billion of that risk was to MBIA.

‘Imperfect Hedging’

“The company’s hedging program for monoline counterparty exposure continues to be costly and difficult to effect because of the basis risk -- risk associated with imperfect hedging -- between the monoline counterparty exposure and counterparty hedges,” Morgan Stanley said in the filing.

Morgan Stanley disclosed that it received a letter last month from Gibbs & Bruns LLP, a law firm that helped draft a proposed $8.5 billion mortgage bondholder settlement with Bank of America Corp. (BAC) The letter alleges that mortgages were sold to the trusts underwritten by Morgan Stanley based on false representations and warranties, according to the filing.

The law firm said it was representing holders of at least 25 percent of voting rights in 17 mortgage-backed securities trusts with more than $6 billion in outstanding balances, according to the filing. The letter also accused the bank of not properly servicing the mortgage loans.

Morgan Stanley also said there’s a “reasonably possible” chance of a material loss from a lawsuit brought by the Federal Home Loan Bank of San Francisco relating to mortgage pass- through securities. The loss from the case could be as much as the difference between $420 million in unpaid principal and the fair value of those securities, Morgan Stanley said.

Firm’s Investments

Morgan Stanley had $4.4 billion of its own money in private-equity, real-estate and hedge funds, according to the filing. That represented 8.3 percent of its Tier 1 capital. The Dodd-Frank Act’s Volcker rule, which regulators issued for public comment last month, would limit such investments to 3 percent of a firm’s Tier 1 capital.

Sixty-three percent of the fair value of the private-equity funds and 48 percent of the real-estate funds have a remaining life of more than 10 years, according to the filing.

Morgan Stanley’s so-called Level 3 assets, which are among the hardest to value, rose to about $40.5 billion at the end of September from about $34.7 billion as of Dec. 31. Unrealized gains from Level 3 assets were $3 billion.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.