Morgan Stanley shines like gold

NEW YORK - Morgan Stanley bested its arch-rival Goldman Sachs in the past three months, better weathering the tough trading environment and recording higher profits across the company.

The investment bank's shares surged by 10 per cent after it revealed the forecast-busting results, which the new chief executive, James Gorman, said were down to the best trading revenues on Wall Street.

After hanging back last year to see if the market recovery was sustainable, Morgan Stanley hired new traders but continued to keep its risks to a minimum - something that helped in the weak and volatile period after April.

Its bottom-line earnings for the three months to June 30 were US$1.6 billion ($2.2 billion), compared with a loss of US$1.3 billion in the same quarter last year.

Two days ago, Goldman Sachs posted quarterly earnings of US$453 million, hit by disappointing results from its trading division and the US$550 million settlement of fraud charges against the company.

Morgan Stanley said Britain's one-off tax on bonuses cost it US$361 million in the quarter. Goldman sent a cheque for US$600 million to the British Treasury.

"While markets were challenging this quarter, Morgan Stanley benefited from a deliberate and disciplined focus on execution," Gorman said.

"We still have a great deal of work to do across our global franchise and anticipate that the difficult market environment may continue in the months ahead. That said, we believe regulatory reforms are a key step toward restoring trust in the industry and the markets."

Gorman took over day-to-day control in January following the partial retirement of John Mack, who remains executive chairman.

While the trading division results pushed overall investment banking revenues up 50 per cent to US$4.5 billion, there was disappointment elsewhere, notably in the wealth management division, which includes the 51 per cent stake in Smith Barney that Morgan Stanley acquired from Citigroup.

Customers withdrew money in the quarter, particularly after the shock of the "flash crash" in May, when the Dow Jones plunged by 1,000 points in 20 minutes.

Michael Holland, the founder of the investment management firm Holland & Co, applauded the results overall.

"John Mack and James Gorman are beginning to pull this thing together, after a long campaign. The revenue line is key and it shows the overall business is healthy, and it is a credit to the people reshaping the business."

Meanwhile, Ben Bernanke, the chairman of the US Federal Reserve, warned yesterday that the outlook for the world's largest economy was "unusually uncertain" and that unemployment would prove slow to fall.

In testimony to Congress, the central banking chief signalled that he saw no urgency to reduce the monetary stimulus given to the economy through the Fed's programme of quantitative easing last year.

And he also eschewed an opportunity to browbeat lawmakers about the need to reduce the US budget deficit, something he has taken on almost every other recent statement on Capitol Hill, as economists' fears grow that a contraction in Government spending could crimp the nascent economic recovery.

While traders looked for linguistic nuances, Bernanke's statement hewed closely to the minutes of the most recent meeting of the Fed's interest rate setting committee, in which it was revealed that the central bank has increased its forecasts for unemployment in the next three years and cut its forecasts for inflation.

- INDEPENDENT