Morgan Stanley (MS) earnings: What went wrong?

All the things that went right with Lehman's (NYSE: LEH) earnings yesterday went wrong with Morgan Stanley's (NYSE: MS) today. Lehman beat most estimates and its CFO said most of the market shocks were behind it.

Morgan Stanley said that its institutional securities unit had sales and trading losses of $877 million related to loans it made to companies making acquisitions, so-called "bridge loans". The company said the losses were the result of its writing down the value of loans on its books by a total of $940 million. Its quantitative trading strategies also lost money.

The big investment bank reported income from continuing operations for the third quarter ended August 31 of $1.474 billion, a decrease of 7% from $1.588 billion in the third quarter of 2006. Net revenues were $8.0 billion, 13% above last year's third quarter.

There were one or two silver linings. Investment bankig revenue was up 45% to $1.4 billion, but that business is likely to be tougher in upcoming quarters as M&A activity falls off. Global wealth management and asset management also did well.

Wall Street now has to question whether Morgan Stanley will have more large write-downs in the next quarter, and whether the bad news will dog peers like Merrill Lynch (NYSE: MER).

The quarter looks rougher for investment banks.

Douglas A. McIntyre is a partner at 247wallst.com.