Is It Safe? Morgan Stanley Ratchets Up Risk

But at Morgan Stanley's annual shareholders' meeting last month, Mack said the firm had experienced "an exodus of key people" since it accepted funds from the Troubled Asset Relief Program. He said the program's compensation limits were the chief threat to long-term profitability. Management floated the idea of spinning out its Process Driven Trading group, an internal hedge fund, so it could retain talent and avoid government scrutiny over compensation.

Earlier this week, news broke that Morgan Stanley had applied to pay back its TARP aid, suggesting the company could be abandoning its conservatism. Shares of Morgan Stanley have fallen 37% in the past year, while Goldman Sachs is down 25%.

We rate the stock "hold" with a grade of D-plus, reflecting its poor earnings and high debt-to-equity ratio. However, if Morgan Stanley gets back on board with proprietary trading and principal investments, and can extend the strong performance of its advisory business, it might generate a second-quarter surprise.

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