Morgan Stanley Loss Fueled by House Bets

The company lost $2.34 a share vs. analysts' forecast of 34 cents a share.
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Updated from 8:58 a.m. EST

Morgan Stanley

(MS) - Get Report

posted a surprisingly large $2.37 billion loss in the fourth quarter, apparently due to wagers it made with its own money in proprietary trading and private equity investments.

Most of the losses are probably attributable to positions Morgan Stanley already had on its books when the quarter began. Virtually any investment that depends on positive economic news has declined in value over the last quarter.

Investment banking earnings statements are notoriously vague, but Morgan Stanley assigns losses to only two areas, "trading" and "investments," both of which are subcategories of a business it calls "principal transactions."

The New York-based firm, which is aggressively building on its new status as a

bank holding company

, lost $2.34 per share for the quarter ended Nov. 30. It lost $3.61 billion, or $3.61 per share, during the year-ago period.

Analysts, who have been cutting their estimates in recent weeks because of market turmoil, forecast a loss of 34 cents per share.

The loss came during a quarter when the investment banking sector nearly collapsed as Lehman Brothers failed and

Merrill Lynch

(MER)

sold itself, leaving only Morgan Stanley and

Goldman Sachs

(GS) - Get Report

as independent firms.

Goldman Sachs

shares finished more than 14% higher Tuesday, despite posting a $2.29 billion fourth-quarter loss, its first quarterly loss as a public company.

Both banks also took a major hit in mid-November, when Treasury Secretary Henry Paulson said the government would not buy distressed assets from banks as was originally envisioned under the government's $700 billion Troubled Asset Relief Program, or TARP. The announcement drove prices down across the debt markets.

Goldman and Morgan have worked furiously to rein in costs, including cuts to

compensation

expenses. Morgan Stanley, which canceled its holiday party this year, says "beyond sayings from significantly lower compensation in 2008,

the firm has targeted $2 billion in annual cost savings."

The top seven executives at Goldman have all said they will forgo 2008 bonuses, which led top executives at

Morgan Stanley

, Merrill Lynch and other firms to do the same. Goldman's overall compensation expenses for fiscal 2008 were $10.93 billion, cut nearly in half from what it paid out the previous year.

One example of

Morgan Stanley's

private equity woes can be seen in a large Atlantic City casino it is backing.

TheStreet.com

reported on the troubled investment in October.