Morgan Stanley recorded a loss on continuing operations of $2.2 billion in the three months ending on 30 November compared with a loss of $3.6 billion in the same period a year before, while its global wealth management arm swung into a $55 million loss, hit by the costs of settling disputes over sales of auction-rate securities that were hit hard this year.

The Wall Street firm said income for the financial year ended 30 November was $1.807 billion, or $1.54 per diluted share, down from $2.563 billion a year ago. Net revenues for the year fell to $24.7 billion, a fall of 12 per cent below 2007 levels.

In the latest three month period, net revenues were $1.8 billion, compared with a negative figure of $400 million in the fourth quarter of last year.

Morgan Stanley, like Goldman Sachs which reported a quarterly loss yesterday, is changing its status to a bank holding company.

"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,” chief executive, John Mack, said in a statement.

At its global wealth management arm, the firm’s pre-tax loss of $55 million compared with a pre-tax profit of $378 million in the same three months of 2007. The results for the quarter included a write-down of $108 million related to ARS securities repurchased from clients and a further charge of $256 million related to the ARS settlement previously announced.

Net wealth management revenues were $1.4 billion, a fall of 21 per cent from a year ago. The decline reflected lower transactional revenues, primarily write-downs of $108 million related to ARS and lower underwriting revenues.

Non-interest expenses of $1.5 billion included a charge of $256 million which is related to remaining customer assets covered under the ARS settlement but which have not yet been bought back by Morgan Stanley.

Total client assets of $546 billion fell by 28 per cent, from last year's fourth quarter figure, mainly as a result of weaker markets. Client assets in fee-based accounts stood at $136 billion, a 32 per cent decrease from a year ago and represent 25 percent of total client assets.

Even in the current environment the billion decline in client assets that Morgan Stanley reported in its wealth management business compared to the same period last year is a significant drop, said Alois Pirker, senior analyst for Boston-based advisory firm, Aite Group.

“In previous results most financial firms have been announcing write downs – accounting losses which are more of a measure of potential loss and not the actual losses,” Mr Alois said.

“Now we are seeing the real losses and there is no doubt real losses hurt more. There is no doubt we are beginning to see the actual effect the slowdown is having on these businesses,” he said.

Meanwhile, asset management posted a pre-tax loss of $1.215 billion in the fourth quarter, compared with pre-tax income of $294 million a year before.