Morgan Stanley’s record quarter stained by Archegos collapse

Morgan Stanley surprised investors with a $911 million loss tied to the collapse of Archegos Capital Management, staining what was otherwise a record quarter for revenue and profit.

"The current quarter includes a loss of $644 million related to a credit event for a single prime brokerage client, and $267 million of subsequent trading losses through the end of the quarter related to the same event," Morgan Stanley said Friday in its first-quarter earnings statement.

The hit was related to Archegos, CEO James Gorman said on a call with analysts. The CEO called the matter a "very complex event," and said he was pleased with how the company handled it.

The firm's philosophy is to "cauterize bad stuff" and deal with it as quickly as possible, Mr. Gorman said. Archegos won't change how Morgan Stanley views its prime-brokerage business, but it will be looking hard at certain types of family offices and the adequacy of their financial disclosures, he said.

The Archegos hit leaves Morgan Stanley as the only major U.S. bank to be nursing losses from the flameout of Bill Hwang's family office. The New York-based bank was one of the early backers of Archegos despite the legal taint tied to Mr. Hwang, who was previously accused of insider trading and in 2012 pleaded guilty to wire fraud on behalf of his predecessor hedge fund, Tiger Asia Management.

"This is not going to be well received given peer performance on this matter," Susan Roth Katzke, an analyst at Credit Suisse Group, said in a note to clients.

Shares of the company, which had gained 18% this year through Thursday, rose 0.1% to $80.93 at 9:30 a.m. in New York.

The Archegos collapse rattled investment banks across continents, with Credit Suisse emerging as the worst hit with almost $5 billion in losses from its exposure to the family office.

In the wake of Archegos, Morgan Stanley's equity traders gave up their No. 1 spot, falling behind Goldman Sachs Group and J.P. Morgan Chase, which posted big trading wins earlier this week off a wild quarter for markets.

Equities-trading revenue at Morgan Stanley nevertheless rose 17% to $2.88 billion, compared with the $2.6 billion average estimate of analysts surveyed by Bloomberg. Goldman Sachs and J.P. Morgan have been clawing away at Morgan Stanley's lead in that business, but until now the firm has managed to stay ahead of the pack. Both rivals posted equities revenue in excess of $3 billion for the quarter.

Morgan Stanley Investment Management, meanwhile, posted record assets under management for the quarter following the closing of its acquisition of Eaton Vance Corp. on March 1.

AUM increased 82% as a result of the acqusition to $1.419 trillion as of March 31, up from $781 billion as of Dec. 31. By asset class, liquidity and overlay services rose 49% to $429 billion as of March 31, up from $288 billion as of Dec. 31; alternatives and solutions AUM rose to $418 billion in AUM, up 173% from $153 billion a quarter earlier; equity AUM rose 53% to $371 billion from $242 billionl and fixed income AUM rose 105% to $201 billion from $98 billion.

MSIM's net revenues rose 19% to $1.314 billion from $1.1 billion a quarter earlier, and net income applicable to Morgan Stanley was $275 million in the first qyarter, up 74% from $158 million in the fourth quarter.

In January, Gorman leaped past J.P. Morgan's Jamie Dimon as the best-paid CEO of a major U.S. bank, after being awarded $33 million for the firm's performance in 2020 while running a firm that's a third the size of J.P. Morgan.

One reprieve for Mr. Gorman's firm was the timing of the fund's blowup. In any other quarter, the losses would have stood out more starkly. Instead, the hit came at a time when the bank and all its major peers have smashed one record after another, helping dull the pain.

"Such a shame we have to talk about the" Archegos hit, given the strong results throughout the rest of the firm, Glenn Schorr, an analyst at Evercore ISI, said in a report titled, "Other Than That, It Was a Great Quarter, Mrs. Lincoln."

Fixed-income trading revenue at Morgan Stanley rose 44% to $2.97 billion, compared with the $2.2 billion analysts were predicting before earnings season kicked off.

Morgan Stanley's investment bankers pulled in $2.61 billion in fees, compared to the $2 billion analyst estimate, as equity underwriting quadrupled. The quarter proved particularly lucrative with the continued explosion in blank-check companies, better known as SPACs, as well as public offerings from technology companies.

Banks are also having to fend off fierce demand for their top talent, with venture-capital firm General Catalyst this month luring away Paul Kwan, Morgan Stanley's head of West Coast technology investment banking.

The acquisition of E-Trade last year also proved timely, as average daily trading surged in the first quarter, well above its fourth-quarter record. The firm also announced the completion of the Eaton Vance takeover last month, adding another business likely to throw off consistent fee-based revenue.

Rob Kozlowski contributed to this report.