Morgan Stanley Traders Lost Money on 12 Days in Quarter

Morgan Stanley, whose traders posted the biggest second-quarter revenue jump among U.S. banks, disclosed that it lost money in that business on 12 days in the period, down from 15 a year earlier.

Traders generated more than $100 million on four days, up from three in the second quarter of 2012, the New York-based company said yesterday in a regulatory filing. None of the daily losses exceeded the bank’s so-called value-at-risk, an estimate of potential trading losses.

Morgan Stanley posted the highest equity trading revenue among Wall Street banks for the first time in at least two years. It also posted a 50 percent jump in fixed-income and commodities trading, excluding accounting charges tied to the firm’s own debt.

The performance reflected a rebound from the year-earlier quarter, when the firm posted its lowest fixed-income revenue in more than two years. The company has said the underperformance was caused in part by clients halting some trading amid a Moody’s Investors Service review of its credit rating that quarter, which resulted in a downgrade.

In January, Chief Executive Officer James Gorman, 54, announced plans to reduce the amount of capital used by the fixed-income trading business as he seeks to double return on equity even without any improvement in markets. Last month, the firm said its risk-weighted assets in that unit were $239 billion, below the $255 billion it had previously sought to reach by the end of this year.

Unrealized Losses

Rising interest rates led to $342 million of unrealized losses on investments in the company’s available-for-sale portfolio in the second quarter. While the losses don’t appear in the firm’s income statement, accounting rules require them to be included in accumulated other comprehensive income, or AOCI. Swings in AOCI affect shareholder equity.

Morgan Stanley set aside $199 million for litigation expenses in the second quarter, up from $4 million in the prior-year period. The firm didn’t give a reason for the increase. The bank also had $32 million in severance costs in the quarter, more than double the $15 million a year earlier.

The company disclosed a “reasonably possible” loss related to a lawsuit from Metropolitan Life Insurance Co. over mortgage-backed securities. The company said it could face a loss of the difference between the fair value of the assets and the $369 million in unpaid balances plus the $28.3 million of incurred losses.

Physical Commodities

Morgan Stanley also said its holdings of physical commodities fell to $4.93 billion, the lowest level in more than three years. The bank has cut jobs and shut businesses including agricultural products after commodities trading posted a return on equity of less than 5 percent in 2012, the lowest among the company’s fixed-income trading units.

U.S. lawmakers have questioned whether banks should be allowed to own physical commodities businesses. JPMorgan Chase & Co. said last week that it is considering exiting the business of owning and trading physical commodities ranging from metals to oil.

Before it's here, it's on the Bloomberg Terminal.