Morgan Stanley slips, funding concern trumps earnings Brokerage firm's profit down, but tops forecasts; stock falls further in pre-open By John Spence, MarketWatch Last update: 9:20 a.m. EDT Sept. 17, 2008 BOSTON (MarketWatch) -- Morgan Stanley shares fell more than 15% in pre-open trade Wednesday as investor concerns about slowing business and possible capital needs trumped a better than expected earnings report. The firm announced its quarterly results ahead of schedule late on Tuesday in a move designed to soothe investors after the shares fell more than 10% during the session. However, the stock continued to fall in pre-open trade, shedding more than 15%, to trade at $24.20. The company is one of two remaining independent investment banks, down from five at the beginning of the year. Investors are wary that Morgan or Goldman Sachs (GS Goldman Sachs Group, Inc GS) could topple before credit conditions improve. And, analysts and investors are mulling the possible need for Morgan to tie up with a commercial bank to provide a deeper funding pool for operations. "Management indicated that it does not need to combine with a bank and that it has taken actions to strengthen its balance sheet, such as improve its liquidity," Deutsche Bank analyst Mike Mayo told clients in a Wednesday research note. However, investors appear unconvinced. Results top estimates The investment bank (MS morgan stanley com new MS) reported fiscal third-quarter net income of $1.43 billion, or $1.32 a share, down from $1.54 billion, or $1.44 a share, in the year-ago period. Consolidated net revenue rose slightly to $8.05 billion from $7.96 billion. The results came in ahead of expectations. Wall Street analysts polled by Thomson Financial had forecast, on average, net income of 77 cents a share on revenue of $6.28 billion. The company said it pre-announced earnings "in order to provide the market with information on Morgan Stanley's financial performance in the most timely manner possible." Morgan Stanley said it booked quarterly net write-downs in the mortgage proprietary trading business of $640 billion. Net revenue in fixed-income sales and trading fell 8% from a year earlier to $1.9 billion. The company blamed the decline on the widening of its credit spreads on certain long-term debt. Morgan Stanley also cited "continued dislocation in the credit markets." The firm swung to investment losses of $245 million in the quarter, which included losses in real estate funds. Equity sales and trading net revenue rose 42% to $2.7 billion and the prime-brokerage business posted record results, Morgan Stanley said. Underwriting revenue fell 19% from the year-ago period to $631 million. Advisory revenue fell 40% to $401 million. Morgan Stanley advised the Treasury Dept. on "strategic alternatives" for mortgage giants Freddie Mac (FRE Freddie Mac News, chart, profile, more FRE) and Fannie Mae (FNM Fannie Mae FNM) before the government bailout. Investment-banking revenue dropped 31% to $1.15 billion in a "challenging market environment." The company said it "continued to maintain strong liquidity and capital positions in the quarter" with average total and parent liquidity of $175 billion and $81 billion, respectively. "We have continued to actively reduce our legacy positions and carefully manage our risk, capital, and liquidity," said Chief Executive John Mack in the earnings release. "I am confident that Morgan Stanley's strong balance sheet and product and geographic diversification leave us well-positioned to serve our clients and realize opportunities in these challenging markets." John Spence is a reporter for MarketWatch in Boston.