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Morgan Stanley faces major challenges in the near term, yet Chief Financial Officer Colm Kelleher said the bank has trimmed its exposure to risky assets, bulked up on cash and now intends to take advantage of opportunities created by market turmoil.
-- Morgan Stanley CFO says near-term markets still a challenge
-- Morgan has cash, capital to pursue opportunities
Morgan Stanley reported sharply lower first quarter earnings and $2.3 billion in net losses on mortgages and corporate loans, but the damage was far more manageable than investors had feared.
Executives from Goldman Sachs Group Inc, Lehman Brothers Holdings Inc and Morgan Stanley helped ease concerns they could face the kind of cash shortages that brought Bear Stearns to its knees last week.
Morgan's Kelleher said the firm is now in a position where it can pursue trading and investment opportunities.
"There are near-term cyclical challenges, but none of it challenges our long-term secular growth opportunity for the firm," he said in an interview. "So we think we can navigate the choppy waters safely on the back of our client franchise."
Helping keep Morgan's ship on course is the Federal Reserve, which has granted brokers unprecedented access to liquidity from its discount window. Goldman, Lehman and Morgan all tapped the Fed this week, another development that could help thaw out markets.
To be sure, the storm has not yet passed. Kelleher, who publicly cautioned investors that liquidity issues would roil markets, said he remains cautious.
"We have valuation pressures near-term and there has been a slowdown in revenues," he said.
At the same time, there are a number of factors that could make this a good time to invest. "Corporate fundamentals are still in good shape, with robust cash levels and relatively low leverage. It looks like the Fed and everyone else is determined to keep the economy from entering into a prolonged recession," he added.
Like Goldman CFO David Viniar and Lehman finance chief Erin Callan did yesterday, Kelleher drew a distinction between the technical forces hammering assets and their underlying value.
That stress on fundamentals, and early signs of improving market conditions, suggests big Wall Street banks and hedge funds could be buyers in the coming months. One area of improvement is in leverage corporate loans, which have traded at steep discounts after buyers withdrew.
"From a technical perspective sentiment has been bearish. However, we see some evidence from non-credit players buying into the credit asset classes at these levels," he said.
Still, Morgan is preparing itself for a tough market. Kelleher declined to forecast employment figures at the firm, which cut head count by 2 percent in the first quarter, saying Morgan Stanley continues to assess how it will allocate resources across different businesses and regions.
Morgan's focus has been on accumulating capital and cash. Total liquidity rose 45 percent to $124 billion in the first quarter, while Morgan's total assets as a multiple of capital, the leverage ratio, fell to 27.4 from 32.6 in a quarter.
These figures take on greater meaning since Bear Stearns, weakened by its exposure to mortgage markets, last week suddenly found itself short of cash. In a matter of hours, trading clients drained Bear's accounts and forced it to accept a $2 a share take-over offer from JPMorgan Chase & Co Kelleher said the recent intervention by the Federal Reserve and Morgan's steps "make us feel very comfortable."

Copyright Reuters, 2008

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