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Financial squeeze – Morgan Stanley declares a hit to net income due to $1.2bn in legal costs

Morgan Stanley is the latest major financial institution to declare that it has been hard hit by litigation and the ripple effect of the financial crisis after it reported a fourth quarter 78% drop in net income to $192m due to legal costs and weak fixed income trading.

Revenue for the period rose from $7bn to $7.8bn but legal costs of $1.2bn meant that earnings for the quarter were almost wiped out, the FT reported on Friday (17 January).

In its report the US investment bank declared that ‘the current quarter includes $1.2 billion of additions to legal reserves for mortgage-related matters, specifically litigation and investigations related to residential mortgage-backed securities and the credit crisis.’

Chairman and chief executive officer James Gorman added: ‘Our fourth quarter results demonstrated the consistency embedded in our business model, as revenues increased year-over-year in all three of our business segments. Importantly, we are continuing to address many of the legal issues from the financial crisis. We look forward to further progress on our strategic goals as we move into 2014 with strength and momentum.’

In October, JP Morgan reported a $380m third quarter loss after setting aside $9.2bn to cover its legal costs, the first quarterly loss for the bank in eight years. Chairman and CEO Jamie Dimon claimed that its ‘strong underlying performance’ that term was ‘marred by large legal expense.’

Those results follow a sustained period of turbulence for the New York-based bank including litigation and government investigations into a wide range of issues such as the $6bn losses from its derivatives trader Bruno Iksil, more widely known as the ‘London Whale’, sales of mortgage securities, commodities trading and credit card debt collections.

The high stakes role that in-house banking litigation teams now play within major financial institutions has been reflected by a number of senior moves, including Lloyds Banking Group’s hire of Morgan Stanley’s Michael Hartridge to replace its group litigation and contentious regulatory head Nicola Myatt after she left the bank.

For more on financial institutions facing a tougher regulatory landscape, see Legal Business’ analysis of in-house litigation teams within major financial institutionsSticking to the Rules