Bonus shock at Morgan Stanley after $2.2bn loss

Morgan Stanley today dived into the red for just the second time in more than 20 years and pledged to take back bonus payments from staff if they do anything wrong.

The firm posted losses of $2.2 billion for the final three months of the year - only its second quarterly loss since it went public in 1986. Morgan Stanley last made a loss of $3.6 billion in the same quarter in 2007.

It also announced plans for a new "clawback" provision allowing it take back bonuses from staff who make significant losses or cause "reputational harm" to the firm. The bonus pool was down 50% this year, with chief executive John Mack and two other top brass waiving payments completely. Total pay for its 47,000 staff was down 26% to $12.3 billion.

The results came just a day after arch-rival Goldman Sachs served up a fourth-quarter loss of $2.12 billion, its first in a decade. Goldman chief executive Lloyd Blankfein last night said it was "one of the most challenging years in our industry's history" and Mack echoed that view today.

"The global capital markets and the financial services industry have experienced unprecedented turmoil in the past few months," Mack said. "These exceptional market conditions profoundly impacted our performance this year, especially in the fourth quarter. However, we still achieved three quarters of profitable results and are moving aggressively to reposition the firm for the future. The environment will continue to be challenging."

The Morgan Stanley and Goldman results highlight the crisis that has ripped through banking since the onset of the credit crunch last year.

Both firms have seen their share prices crash this year and were forced to give up their cherished status as investment banks in October to take advantage of $10 billion each of emergency funding from the Government.

They are now struggling to transform themselves into deposit-gathering institutions that rely less on using borrowed money for big market bets.

Rival Lehman Brothers collapsed in September while Bear Stearns and Merrill Lynch were rescued in dramatic bailouts by JPMorgan and Bank of America respectively.

The fourth-quarter losses left Morgan Stanley nursing a 29% fall in annual profits for the year to the end of November to $1.8 billion. Revenues were down 12% to $24.7 billion in 2008. Goldman annual profits fell 80% to $2.32 billion.