$1.12 Of Morgan Stanley's $1.14 Q3 EPS Comes From Benefit Of Spread Blow Out

Tyler Durden's picture

There is just one piece of information one needs to see to realize just how big of a farce financial results reporting has become in America, with the accountants' and auditors' blessing. Morgan Stanley today reported income of $2.2 billion, or $1.14 per diluted share on an apples to unicorns basis, compared with income of $314 million, or $0.05 per diluted share, for the same period a year ago. Net revenues were $9.9 billion for the current quarter compared with $6.8 billion a year ago. Expectations were for revenue and EPS of $7.28 billion and $0.30. Both were massively missed because "results for the current quarter included positive revenue of $3.4 billion, or $1.12 per diluted share, compared with negative revenue of $731 million a year ago related to changes in Morgan Stanley’s debt-related credit spreads and other credit factors (Debt Valuation Adjustment, DVA)." As the DVA, or the benefit from corporate spread explosions, is a top and bottom line number, the real results were $6.5 billion and $0.02. But, no, why report reality when there are fudge factors that soften the blow when a company underperforms. And furthermore, as every bank will tell you, its CDS marks are meaningless: after all, the "CDS market is illiquid and controlled by maniacs" or whatever David Viniar said on the Goldman conference call yesterday (more later on this). As for what matters: Institutional Securities revenue would have been $3 billion net of the DVA compared to $5.2 billion in Q2 - said otherwise a complete business collapse in the quarter.

So aside from the complete collapse in operations at Morgan Stanley, here is some more:

  • Advisory revenues of $413 million increased 11% from a year ago reflecting higher levels of completed activity.
  • Underwriting revenues of $451 million declined 29% from last year’s third quarter on lower levels of market activity. Equity underwriting revenues of $239 million declined 8% from a year ago. Fixed income underwriting revenues of $212 million declined 44% from last year’s third quarter primarily reflecting lower high yield and investment grade bond issuance volumes.
  • Fixed Income and Commodities sales and trading net revenues were $3.9 billion and included positive revenue of $2.8 billion related to DVA.Net revenues for the current quarter reflected market volatility and high levels of client activity in interest rate and currency products as well as commodities, partly offset by losses in credit products due to the stressed credit environment.
  • Equity sales and trading net revenues were $2.0 billion and included positive revenue of $620 million related to DVA. Results in the cash and derivatives businesses reflected high levels of client activity and market volumes.
  • Other sales and trading net losses of $443 million, primarily reflected writedowns associated with corporate lending activity.
  • Compensation expense for the current quarter was $1.6 billion with compensation to net revenue ratio of 24%. This ratio was affected by DVA which increased net revenues in the current period. Non-compensation expenses of $1.5 billion increased from $1.2 billion a year ago primarily reflecting higher levels of business activity and costs associated with the U.K. bank levy.
  • Morgan Stanley’s average trading Value-at-Risk measured at the 95% confidence level was $130 million compared with $145 million in the second quarter of 2011 and $142 million in the third quarter of the prior year.

And since there is no point in analyzing this data as it is on an apples to unicorns basis, readers can see the full meaningless release here.

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GeneMarchbanks's picture

Shouldn't really surprise anyone after the recent moves in financials.

'There is just one piece of information one needs to see to realize just how big of a farce financial results reporting has become in America, with the accountants' and auditors' blessing.'

In all honesty, who's going to call them out on their bullshit? The SEC? Bloomberg?

Smiddywesson's picture

In all honesty, who's going to call them out on their bullshit? The SEC? Bloomberg?

Who's going to call them out?  Perma bears and fringe kooks on the Internet who obviously should be regulated because they are about to cause a systemic collapse of an otherwise healthy recovery.

How you ultra-powerful perma bears can take down a system when you are also a fringe minority is unexplainable, but we are all regulated (lite) so you should be regulated too (i.e., put out of business).

Here comes the Internet kill switch.

Irish66's picture

Europe exposure?

Al Gorerhythm's picture

I gotta get me one of them accountants. I've gotta a DVA to show them. Determined Violent Assault.

qussl3's picture

So what happens when we ban bank CDS too?

mfoste1's picture

these banks have gotten trillions of support since 09 and they still can turn a decent profit?.....hmm would certainly lead an inquisitive mind to speculate that something is wrong with this picture.

"wheres the money shithead?!"


.....where else can you fail miserably and still get record bonuses? If an civil engineer biffs a bridge and it collapses while commuters are on it, do they get paid MORE?

pragmatic hobo's picture

why didn't GS include this fudge factor in their report yesterday? I wonder.

jdelano's picture

that's the funny thing.  THEY DID.  Though to a lesser degree.  

firstdivision's picture

So the "massive" farce begins with the way financials are reporting.  I had to laugh at this http://www.marketwatch.com/story/chinas-forex-drop-looks-suspicious-analyst-2011-10-18.  Apparently China's banks movements are suspicious, yet ours are fine (like yesterdays rumor rally is perfectly normal).

Lmo Mutton's picture

Delusional Valuation Adjustment?

TooBearish's picture

Shapes of 08 -these fukkers are burning the furniture to make they numbers - running out of tricks -crash coming.....

jtmo3's picture

Don't you bet your life, or any cash, on it!

ThisIsBob's picture

Thank God the results allow the bonus calculations to remain on track.

Bansters-in-my- feces's picture

Silly rabbits...

Trix are for kidds.

Market Efficiency Romantic's picture

With the DVA effect on compensation, any negative risk-taking component is finally eliminated from compensation, the entire opposite of what had been announced after the '08 crisis. Depending on how you design risk-taking, it may actually even have a very positive effect on compensation, if you include DVA accounting effects.

The world finally turning upside down.

SilverIsKing's picture

Like watching a slow motion train wreck.

Prepare accordingly.

MFL8240's picture

Every aspect of the finacial markets are a farce.  Look at Gold, it is now considered a risky assett with paper dollars and Treasuries issued by an insolvent goverment considered the safe haven place to be.  The whole sytem, all of Washington, Wall Street, the Chicago sewer and the banking industry are courrpt beyond my wildest dreams and nothing should supreise anyone given the behavior of the current occupant of the White House.

YesWeKahn's picture

It's trading down now. Smart people figured it out.

sabra1's picture

as long as the TOTUS has his overweight, smiley, happy, brain-dead crowd, clapping and cheering his every word, all is well! of course, the truth is, if you do not show up clapping and cheering, kiss your food stamps good riddence!

Ruffcut's picture

They are flat stanley now. A useless paper doll, pretending to be someone.

The Axe's picture

So in a tooth fairy to mermaid calculation to eps   the whisper was .33...and they missed by .69 cents...  probably good for a 3 dollar pop.....lol

JPM Hater001's picture

I did an Apples to Unicorn comparison of my finances and it turns out I have just enough to by Greece.

Retirement here I come!

HD's picture

The apples to unicorns line made me laugh...

Johnny Lawrence's picture

Can someone smarter than me explain the Daily Value Adjustment and how banks can claim it as positive revenue?

Commander Cody's picture

Debt Value Adjustment - meaning the more toxic the debt you hold, the more positive it is on revenue given the value of your hedges?  And no, I am not smarter than you, its a wild-ass guess.

Johnny Lawrence's picture

Thank you both.  It sounds like as your debt becomes more toxic, you are less likely to pay out that debt, thus that somehow counts as a revenue gain for you.


Apocalicious's picture

Yep. Sort of perverse. I owe you $100, but we agree on $50 to call off the debt, and I book that $50 deficiency as a gain. Yay financials!! Yay auditors!!

junkyardjack's picture

I assume we'll be seeing more auditors going out of business once this crash sets in.  Its funny that anyone would sign off on this type of BS.  I hope they are making some extra room in the jails, business is about to be booming

citrine's picture

"Apples to unicorns" is a brilliant expression!

I caught myself quoting you guys (ZH team) verbatim, but you have to forgive me for not always giving you proper credit: it could be tricky at times.

Belarus's picture

The market sure loves BULLSHIT earings. Entire Financail complex: Rocket moon.

junkyardjack's picture

Any earnings report where they don't announce they are bankrupt is bullish

Blue Blood Mutiny's picture

MS 10yr spreads are 250bp tighter from the wides when zerohedge was gleefully posting them two weeks ago. Roughly a 15 bond pt gain in 2 wks.