Morgan Stanley on Wednesday reported a third straight quarterly loss, falling further behind chief rival Goldman Sachs as fixed income and asset management results disappointed.

While Goldman posted a blowout quarter with strong gains in trading and profit, Morgan Stanley was saddled with red ink from the repayment of government bailouts and the accounting ramifications of improvements in its debt prices. Its loss was even wider than Wall Street had expected.

I don't think the market was prepared for such a loss from Morgan Stanley, said Nick Kalivas, an equity market analyst with MF Global Research in Chicago. This was just disappointing.

The results prompted Morgan Stanley Chief Financial Officer Colm Kelleher to label 2009 a year of transition.

We are not into the quick show of how good we are, Kelleher said in an interview with Reuters Television. What we want to show is steady improvement, which we are doing, and fleshing out a model which we believe is robust, within which institutional securities is key.

Morgan Stanley reported a loss applicable to common shareholders of $1.26 billion, or $1.10 per share, for the second quarter, compared with a profit of $1.1 billion, or $1.02 a share, a year earlier. Net revenue fell 11 percent to $5.4 billion.

Stripping out one-time items, Morgan Stanley posted a loss of $1.37 a share, much worse than analysts' average forecast of a loss of 53 cents, according to Reuters Estimates.

Morgan Stanley struggled in key areas during the quarter, including commercial real estate, where it reported net losses of $700 million amid declines in the market.

We have been clear that real estate was our biggest concern as an asset class, said Kelleher, adding that over time he is hopeful real estate losses will decelerate.

Morgan Stanley shares were down 1.2 percent at $27.33 in midday trade on the New York Stock Exchange.

NO CONTEST

As Morgan Stanley searches for a sustainable model, Goldman Sachs Group Inc may have already found a winning strategy. Goldman posted a 33 percent rise in quarterly earnings last week.

During the quarter, Morgan Stanley repaid $10 billion from the government's Troubled Asset Relief Program, incurring a one-time charge of $850 million. The improvement in its debt prices reduced net revenue by $2.3 billion.

Fixed income trading revenue rose 44 percent from a year earlier to $973 million, including a $1.3 billion loss related to debt-related credit spreads. Goldman reported $6.8 billion in fixed income, currency and commodities trading revenue, almost triple its year-earlier total.

Morgan Stanley said concerns about fixed income performance, which fell short of expectations, were being addressed. The firm on Monday announced the hiring of Jack DiMaio, a former Credit Suisse Group AG fixed-income head for North America. DiMaio was named global head of interest rate, credit and currency trading at Morgan Stanley.

The bank set aside $3.9 billion for compensation expenses in the second quarter, up from $3.1 billion a year earlier. Goldman was widely criticized for setting aside $6.65 billion in the quarter, a total that could foreshadow average employee payouts for 2009 of nearly $1 million.

Morgan Stanley, which ratcheted down risk-taking after the fall of some of its competitors last year, said its risk measurements were flat in the quarter.

The bank's value at risk, a measure of the maximum possible losses it faced on 95 percent of its trading days, on average was $113 million, compared with $100 million a year ago and $115 million in the first quarter of 2009.

Goldman Sachs, known for its risk-taking prowess, reported value at risk of $245 million in the second quarter, a 2 percent increase from the first quarter.

(Reporting by Steve Eder; editing by John Wallace)

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