Morgan Stanley was right to trim trade risk-Mack

By Joseph A. Giannone

NEW YORK (Reuters) - Critics who complain Morgan Stanley (MS.N) dropped the ball by not taking enough first- quarter trading risk have a fair point, but Chief Executive John Mack contends being cautious was the right move.

Last week, analysts came down hard on Morgan Stanley's fixed-income trading results: $1.3 billion of revenue compared with $6.56 billion at Goldman Sachs Group Inc (GS.N) and $4.9 billion at JPMorgan Chase & Co (JPM.N).

The weak trading performance contributed to Morgan Stanley reporting a quarterly loss, while its two rivals took advantage of market conditions to report surprisingly large profits.

"That's fair criticism," Mack told Reuters in a brief interview just after the firm's annual shareholder meeting. "Could we have taken more risk? Without question we could have, but we didn't think it was the right thing to do given the volatility and, really, the fragility of the market."

Mack, who rose through the ranks as a bond trader, said the bank's $578 million net loss was largely the result of real estate writedowns and a charge related to the rising value of certain Morgan Stanley debt.

Morgan's biggest losses during the past two years came mainly from hard-to-sell instruments such as structured mortgage debt, commercial real estate and leveraged buyout loans. The bank was stuck with these assets when markets froze.

"If you think about some of the trades we've done in the past, we put those on our books. But when you want to reverse those trades, you don't do it by picking up the phone and doing a trade. It can take a month or so to get out of those trades."

Yet Mack stressed Morgan Stanley has not abandoned trading. Rather, it will focus on more liquid assets.