Is It Safe? Morgan Stanley Ratchets Up Risk

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Morgan Stanley(MS), one of the last American investment banks, played it safe during the first quarter and lost $177 million. But the pressure to compete might whet its risk appetite and boost second-quarter earnings.

The New York-based company's performance suffered as its real estate investments, loans and subsidiary-bank securities lost value. Weak results set the firm apart from rivals Goldman Sachs(GS), JPMorgan Chase(JPM), Bank of America(BAC) and Wells Fargo(WFC), which generated profits during the period.

As the last two standalone investment banks, Morgan Stanley is enduring unsavory comparisons to Goldman Sachs. Unlike its archrival, Morgan Stanley hasn't been willing to make riskier trades to compensate for losses.

Morgan Stanley's average trading value at risk, the amount that could be lost in a day, was $115 million in the first quarter, up a modest 16% from a year earlier.

In contrast, Goldman Sachs's value at risk jumped 22% in its fiscal first quarter to $240 million, almost doubling Morgan Stanley's risk position. The bets at Goldman Sachs paid off as revenue jumped to a record $9.4 billion and earnings climbed to $3.39 a share. It was a turnaround from the fourth quarter, when the company reported a loss of $4.97 a share and so-called negative revenue of $1.58 billion.

Morgan Stanley's management must feel pressure to adopt a strategy that relies more on proprietary trading and principal investments, Goldman Sachs's twin profit engines. Morgan Stanley CEO John Mack's response has been fickle.

On one hand, Mack has been preaching a focus on traditional investment banking services. After receiving taxpayer aid, the firm cut its leverage ratio to 11 from more than 32 pre-crisis, and pledged to concentrate on brokerage, trade execution, advising and asset management. The company's risk managers restrained traders in the first quarter, cutting the amount of capital available for counterparty trades.