Updated from 8:56 a.m. EDT

The bad news keeps coming at

Morgan Stanley



The big Wall Street firm, still reeling from the turmoil in its executive offices, reported Wednesday a 24% decline in second-quarter profits, slightly worse than it had warned investors to expect a week ago.

In the quarter, the firm earned $928 million, or 86 cents a share, down from $1.22 billion, or $1.10 a share, in the year-ago quarter. Net revenue was $6 billion, down 9% from last year.

A week ago, in announcing that CEO Philip Purcell would resign, the firm predicted that earnings would fall by as much as 20% from the year-ago quarter.

But Morgan Stanley, in its earnings announcement, said that estimate had been prepared before it began settlement discussions over the firm's role in the accounting mess at


, the Italian-based dairy company. In conjunction with those talks, Morgan Stanley said it recently decided to set aside an additional $140 million in its legal reserve, a move that depressed earnings further.

After last week's earnings warnings, analysts, as surveyed by Thomson Financial, had reduced their estimate of Morgan Stanley's earnings to 92 cents a share. Net revenue, however, exceeded the analysts' forecast of $5.67 billion.

News that revenue came in ahead of expectations provided a bit of juice to Morgan Stanley shares in premarket trading, with the stock rising 23 cents to $51.20.

As expected, much of the 9% decline in revenue at Morgan Stanley was due to the poor performance of its institutional securities group, which includes its proprietary trading desk, and a slide in underwriting revenue. Net revenue from the division fell 15% to $3.36 billion.

Trading revenue fell 28% from a year ago to $1.3 billion. Revenue from underwriting stock and bond issues tumbled 33% to $378 million, with stock offerings performing worst of all. Equity underwriting revenue fell 54% compared to a year ago, much worse than the 31% industrywide decline.

In a conference call, Morgan Stanley CFO David Sidwell would not say whether the firm had made any particularly bad trading bets in the quarter. He simply said "trading opportunities were not evident.''

Revenue in Morgan Stanley's big brokerage arm rose a modest 2% to $1.23 billion.

The second-quarter earnings at Morgan Stanley, as bad as they were, came in slightly ahead of the 27% earnings slump reported last week by

Goldman Sachs

(GS) - Get Report

. Like Morgan Stanley, revenue from trading and underwriting fell sharply at Goldman.


Bear Stearns



Lehman Brothers


both surprised Wall Street experts by reporting higher second-quarter profits.

Many people on Wall Street believe the poor second quarter at Morgan Stanley was the clincher that sealed Purcell's fate and led to his surprising decision to announce his resignation. Purcell's announcement came just as many on Wall Street believed he would survive a bruising battle with a group of Morgan Stanley alums who had been calling for his ouster for weeks.

But the poor earnings results, coupled with the defection of dozens of top traders and investment bankers, became too great a burden for Purcell to shoulder.

In the conference call, Morgan Stanley said it would have little to say about the search for a new CEO.

Sidwell, however, confirmed the firm is reviewing its earlier decision to spin off its Discover credit card business. He said the company is in the process of gathering information to make sure the spinoff is in the best interests of shareholders.

Purcell announced the company was planning to spin off Discover in April, a move that many on Wall Street saw as an attempt to deflect some of the criticism coming from his opponents. The spinoff announcement was a surprise, given that Purcell had always argued that the credit card business was one of the things that set Morgan Stanley apart from other Wall Street giants. As recently as March, he was saying the firm had no desire to unload the Discover business.

Some have suggested the spinoff makes little sense because Morgan Stanley would have to invest too much capital into Discover for it to exist as a stand-alone company. David Hendler, an analyst with CreditSights, estimates that as a stand-alone business, Discover would probably need an additional capital infusion of $1.5 billion to maintain its current credit ratings.

But Morgan Stanley said it would only need to increase Discover's capital base by an additional $430 million if it decides to go ahead with the spinoff. Presently, Morgan Stanley allocated $4.3 billion in capital to Discover, which is the nation's seventh-largest credit card issuer.

"If we were to complete the spinoff, the capital would be in the range of $4.5 billion to $4.7 billion,'' says Sidwell.