Morgan Stanley‘s (MS) first quarter earnings are expected to be negatively effected by the recent rebound in its bond prices, according to a report by the Wall Street Journal Thursday. The Journal‘s sources told the pub that an “accounting treatment” used on certain bonds issued before the financial crisis escalated would cause the firm to take a hit anywhere from $1.2 billion to $1.7 billion on its quarterly earnings, which are due out later this month. Although the bonds in question — valued recently at $29 billion — rallied recently, the Journal reported that the gains forced Morgan Stanley to increase the paper value of certain bonds it owes to investors. Morgan Stanley was trading at just over $24, up almost 7.5 percent, by mid-morning Thursday after the reports began circulating. The anticipated impact on first-quarter performance would mark the second quarterly posting of worse-than-expected earnings. Morgan Stanley posted a substantial fourth-quarter loss of $2.19 billion, or $2.24 per share, driven by “unprecedented market turmoil” and mortgage-related write-downs. Fixed income sales and trading — which include its mortgage business — registered net losses of $1.2 billion. “The global capital markets – and the financial services industry — have experienced unprecedented turmoil in the past few months,” chairman and CEO John Mack said in December. “These exceptional market conditions profoundly impacted our performance this year, especially in the fourth quarter.” Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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