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Morgan Stanley's Fourth Quarter Profit Hammered By Legal Expenses

Profit falls 70 percent from a year ago thanks to $1.2 billion in legal expenses.

Posted on January 17, 2014, at 8:03 a.m. ET

Morgan Stanley's transformation from high-flying sales and trading shop to a more diversified, stable financial company is still on pace, but its fourth quarter results were haunted by its financial crisis excesses.

The bank reported a profit of $181 million or seven cents a share thanks to setting aside $1.2 billion in legal expenses, a 70% decline from a year ago; the bank's reported revenue was $7.8 billion, a 12% increase over the year.

Morgan's legal expense was substantially more than its main rival as a stand-alone, American investment bank, Goldman Sachs, which put aside, "only" $561 million. In a statement, Morgan Stanley said that the reserve addition was for "litigation and investigations related to residential mortgage-backed securities and the credit crisis."

Morgan Stanley was one of 18 banks sued by the Federal Housing Finance Agency in 2011 for allegedly misleading the two government mortgage companies, Fannie Mae and Freddie Mac, about the quality of mortgage-backed bonds the banks sold.

The FHFA has already settled with seven banks for almost $8 billion, including a $5.1 billion settlement with JPMorgan. Some think that Morgan's tab might be around $1.4 billion, based on how much the FHFA has settled for compared to the total value of the mortgage secruties Fannie and Freddie purchased from that particular bank.

"We are continuing to address many of the legal issues from the financial crisis," Morgan Stanley CEO James Gorman said in a statement.

Taking out the legal expense, which could be one-off and some other items, Morgan Stanley earned 50 cents a share.

Morgan Stanley is however still continuing its return to stability and even consistent profitability under the leadership of Gorman, who took over as chairman in 2012 and CEO in 2010. Coming from the bank's wealth management division, Gorman has made an explicit point of making the firm less risky and less reliant on volatile trading profits. In an interview last year, Gorman said "We were flying pretty close to the sun during the financial crisis, a little closer than some others," referring to a trading culture that almost sunk the firm.

This shift was reflected in this quarter's results, as wealth and investment management earned had revenues of $4.6 billion, over 58% of the firm's total quarterly revenues. Wealth management and investment revenue grew 16.6% over the year, while revenue from investment banking, which includes advisory, sales, and trading, came in at $3.3 billion, an 8% increase from a year ago, but a 10% decline from the previous quarter.

"Our fourth quarter results demonstrated the consistency embedded in our business model, as revenues increased year-over-year in all three of our business segments," Gorman said, "We look forward to further progress on our strategic goals as we move into 2014 with strength and momentum."

While the bank's priorities have shifted towards more conservative business, this past quarter was still good for its employees. While many of its peers have had flat compensation over the year — and Goldman's actually fell by 3% — Morgan Stanley reported that its compensation expense for the quarter was $4 billion, just over 50% of its revenue, up 10% from $3.6 billion a year ago, when it was 52% of its revenue.

Bloomberg reported this morning that some Morgan Stanley bankers will get their bonuses for 2013 immediately in cash. Last year the bank deferred all of its senior employees' 2012 bonuses.