UPDATE 7-Morgan Stanley posts big loss; market hopes worst over

"Maybe the message is these guys are going to survive, and if a company is going to survive, their stocks should at least be at book," said Sanford C. Bernstein analyst Brad Hintz.

But because of such large gains from one-time items like the bank's weakening debt, the results were of "poor quality" Hintz said, adding that the company's conference call left too many questions unanswered.

Early in the session, Morgan Stanley shares fell as the results showed how badly investment banks could get hurt by a market slump that became a rout in November.

Merger and underwriting activity came to a screeching halt, with break-ups outpacing deals. Morgan Stanley's bigger rival, Goldman Sachs Group Inc (GS.N) posted similar losses on Tuesday as questions arose about the future profitability of traditional investment banking businesses.

"Everyone knew this quarter was going to be awful," Fifth Third Asset Management portfolio manager Jon Fisher said. "There's just nothing going on in the business."

With business weaker for the year, Morgan Stanley cut salaries by 26 percent total, paying its employees $12.3 billion in compensation and benefits for 2008, compared with $16.6 billion a year ago.

Moody's Investors Service cut Morgan Stanley's senior debt rating by a notch to "A2," citing the results and the bank's exposure to credit markets.

The stock closed up 37 cents to $16.50 on the New York Stock Exchange, where they climbed as high as $17.93.

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