TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Morgan Stanley

(MS) - Get Report

, 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) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Bank of America

(BAC) - Get Report

and

Wells Fargo

(WFC) - Get Report

, which generated profits during the period.

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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.

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.