Morgan Stanley revealed that continued market deterioration since the end of August has reduced the value of its subprime exposure by US$3.7 billion.

At the end of Morgan Stanley’s fiscal third quarter on August 31, the firm had US$12.3 billion in U.S. subprime related balance sheet exposures representing US$10.4 billion in net exposures. It now says that its net exposure, as of October 31, is US$6.0 billion. Net exposures are defined as potential loss to the firm in a 100% loss default scenario, with zero recovery.

Since August, the fair value of these exposures has declined as a result of the continued deterioration in market data, the firm says. As a result of these declines in value, Morgan Stanley’s revenues for the two months ended October 31, were reduced by US$3.7 billion (representing a decline of approximately US$2.5 billion in net income on an after-tax basis).

The actual impact on the firm’s fourth quarter financial results, which will include results for November, will depend on future market developments and could differ from the amounts noted. It still expects to deliver solid results in each of its other businesses, including Investment Banking, Equities, Global Wealth Management and Asset Management.

“It is expected that market conditions will continue to evolve, and that the fair value of these exposures will frequently change and could further deteriorate,” the firm said in a news release.

“Given these anticipated fluctuations, Morgan Stanley does not intend to update this information until it announces its fourth quarter 2007 earnings in December 2007. Investors also should not expect the company to provide information about the results of future quarters in advance of scheduled quarterly earnings announcement dates.”