Bonus shock at Morgan Stanley after $2.2bn loss

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.

Mack blamed the dismal fourth quarter on "unprecedented market turmoil" and writedowns on investments as well as on clients withdrawing cash from its asset-management business.

The downturn has seen Morgan Stanley axe thousands of staff including some 1000 at Canary Wharf, cutting its London workforce to about 5000. It emerged the head of Morgan Stanley's Asia Pacific private-equity banking team is leaving less than a year after arriving in Hong Kong to run it.

Managing director Jonathan Mandel was let go as part of the round of layoffs announced last month. His fast departure from his new post underscores the brutal environment that private-equity firms and their bankers face, not just in Western countries but Asia too.