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Morgan Stanley Profit Falls

It becomes the second bank to take a big writeoff.
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Updated from 7:52 a.m.

Morgan Stanley

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posted a modest drop in fiscal third-quarter earnings and said it took nearly a billion dollars worth of mark-to-market losses on its loan book.

The New York firm made $1.47 billion, or $1.38 a share, from continuing operations, down from the year-ago $1.59 billion, or $1.50 a share. Revenue rose 13% from a year ago to $8 billion.

Analysts surveyed by Thomson Financial were looking for a $1.54-a-share profit on revenue of $8.35 billion.

"Morgan Stanley's diversification across businesses and regions helped us deliver

return on equity of 17.2% this quarter, despite the impact of the severe market disruption on some areas of the firm -- including our credit products, leveraged lending and quantitative strategies businesses," said CEO John Mack. "Even with these turbulent markets, Morgan Stanley still delivered strong performances across many core businesses and achieved record results in our prime brokerage, derivatives and interest rate & currencies businesses. In addition, we continued making progress in executing our growth plans and vastly improving performance in Asset Management and Global Wealth Management."

The news comes as investors scrutinize results on Wall Street to measure the impact of this summer's credit crunch. Big questions for the brokerage firms are how exposed they are to the meltdown of the mortgage-backed securities market and how much money they might lose on loans backing leveraged buyouts.

Morgan Stanley said third-quarter fixed-income sales and trading net revenues were $2.2 billion, a 3% decrease from the third quarter of 2006. The decrease was driven by significantly lower credit revenues as spread widening, lower liquidity and higher volatility resulted in lower origination, securitization and trading results across most products. Commodities revenues were down on lower trading results.

These decreases were partly offset by record results in interest rate and currency products, which benefited from stronger revenues in interest rates and foreign exchange. Fixed-income sales and trading also benefited by approximately $290 million from the widening of Morgan Stanley's credit spreads on certain long-term debt.

Other sales and trading net losses of $877 million primarily reflect losses of $940 million from marking to market loans and closed and pipeline commitments, largely related to acquisition financing provided to non-investment-grade companies.

On Tuesday,



said problems in the mortgage and LBO markets cut its fixed-income revenue by $700 million for the third quarter. The firm said it wrote off more than $1 billion of its assets in those categories, though Lehman execs declined to offer the kind of detail Wall Street was looking for.

Bear Stearns




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are due to report results Thursday.

Morgan Stanley rose 77 cents to $69.28.