It was the bank's second quarterly loss in the last five quarters, driven by US$1.7 billion of writedowns of corporate loans, US$800 million of writedowns of securities held in bank units, and US$1.8 billion of investment losses.

Morgan Stanley also took charges reflecting the impaired value of two recent deals: US$725 million related to subprime mortgage company Saxon Capital, bought in December 2006, and US$243 million related to Crescent Real Estate, purchased in August 2007.

'The numbers are not good,' said Mr Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey. 'They're cutting back on many, many different business lines, so it calls into question what is return on equity going to be down the road.'

The disappointing results would have been even worse but for one-time gains: US$2.1 billion from debt repurchases and a US$2 billion accounting gain from the falling value of Morgan's own bonds.

Morgan Stanley shares initially fell as much as 8 per cent on the earnings news and were down 1.5 per cent near midday. The shares jumped 18 per cent on Tuesday, boosted by a Federal Reserve interest rate cut and quarterly results from Goldman Sachs that were not as bad as Wall Street had feared.

Credit rating agency Moody's Investors Service cut Morgan Stanley's senior debt rating by a notch to 'A2', citing the quarterly results and the bank's exposure to credit markets.

Unprecedented and unexpected
The New York bank said it lost US$2.20 billion, or US$2.24 a share, in the fiscal fourth quarter, ended Nov 30. Analysts' average forecast was a loss of just 33 cents a share, according to Reuters Estimates.

Morgan Stanley, which in September converted to a bank holding company after investors lost confidence in the highly leveraged broker-dealer model, said it seeking US$2 billion in cost savings, including previously announced job cuts.

Business in the quarter was bad virtually across the board.

From underwriting to trading, revenue fell off a cliff as stock and fixed-income markets went from bad to worse.

'Nobody expected November to be as bad as it was,' Morgan Stanley Chief Financial Officer Colm Kelleher said in an interview, noting results reflected deep losses on assets hammered by what he called 'irrational pricing'.

Mr Kelleher also told Reuters some of the damage reflected trading positions that were 'caught offsides' by unprecedented turbulence during the quarter. 'It was an incredibly stressed environment.'

For now, Morgan Stanley continues to suffer from its efforts three years ago to emulate its more profitable rivals by taking on more trading risk, betting more capital on investments and leveraged buyouts, and building a mortgage business.

In the year-earlier fourth quarter, Morgan reported a loss of US$3.6 billion, or US$3.61 a share, fuelled by US$9.4 billion in mortgage losses. The bank was forced to sell a US$5 billion equity stake to China.

The bank worked aggressively to strengthen its balance sheet, shedding risky assets and toning down risk, but the markets weakened at an even faster clip. Bear Stearns was forced into the arms of JPMorgan Chase in March, and Lehman Brothers collapsed into bankruptcy in September.

Morgan Stanley got a much-needed shot in the arm in October with a US$9 billion investment from Mitsubishi UFJ Financial Group Inc, followed by US$10 billion from the US Treasury.

Still, prior to Tuesday's gain, its shares had lost three-quarters of their value this year.

In part, that decline reflected nagging questions about the ability of Wall Street firms to survive and thrive in the new, de-leveraged world. Morgan Stanley has said it is scaling back proprietary trading and principal investments while slashing its use of leverage - all of which may limit its profits in the future.

'They need growth and leverage on that growth to work, and right now they don't have that,' said Mr Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis. 'So it's tough for them to report earnings and earnings growth with this kind of model.' -- REUTERS