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

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.