Trying to be God in creating a Money Making Machine?

"Morgan Stanley 3Q Profit Down"
Screams the headline after the Fed announces a half point cut in interest rate which got all markets bullish.

Then I came across this news. Morgan Stanley 3Q profit down due to global credit crunch of the sub-prime mortgage.

Profit for the three months ended Aug. 31 fell to $1.54 billion, or $1.44 per share, from $1.85 billion, or $1.75 per share, in the year ago period. This year's third quarter included only one month of results from Discover Financial Services, which split from Morgan Stanley in June.

Stripping out profit from the credit-card unit, profit fell 7 percent to $1.47 billion, or $1.38 per share, from $1.59 billion, or $1.50 per share.

Stronger investment banking fees, largely from deals announced well before the third quarter, helped drive revenue up 13 percent to $7.96 billion from $7.06 billion a year earlier.

However, that still was not enough to beat Wall Street projections for a profit of $1.54 per share on $8.35 billion of revenue, according to analysts polled by Thomson Financial.

The company said it saw losses of $940 million in the quarter from the decreased market value of loans on its books as well as other financing commitments. Those losses cut 33 cents per share off of its bottom-line results.

Quantitative investments, which use computer models to automatically decide when to buy and sell stocks, were also a problem across Wall Street this summer. Morgan Stanley pegged its quantitative trading losses at $480 million during the quarter.

Investment banking was among the bright spots; revenue from the business surged 45 percent to $1.4 billion.

Morgan Stanley shares fell 76 cents to $67.75 in premarket electronic trading after closing Tuesday at $68.51. The stock has tumbled 24 percent since the end of the second quarter, as financial services firms were squeezed by defaults in mortgage positions and a tightening credit environment.


I laugh on seeing an investment banking giant like Morgan Stanley thinking that they could profit on creating a money making quantitative model. If only the world is so simple (sure, all quants would argue their models are intricately designed to handle all complexities), the banks can just design a model that helps them predict TOTO/Lottery winning combinations. I think it's more sane than creating models that automatically invest for you.