Morgan Stanley lost US$2.3 billion in its fourth quarter, ended Nov. 30, ending a string of three profitable quarters, the company reported Wednesday.

For the quarter, the net loss was US$2.295 billion, compared with the net loss of US$3.6 billion in the fourth quarter of 2007.The loss from continuing operations for the fourth quarter was US$2.195 billion. Net revenues were US$1.8 billion, compared with negative US$0.4 billion in last year’s fourth quarter.

Net income for the year was US$1.7 billion, compared with US$3.2 billion a year ago. The return on average common equity for the year was 4.9%, compared with 8.9% a year ago. Net income for fiscal 2007 included the results of Discover Financial Services (Discover), which are reported in discontinued operations. Costs in fiscal 2008 related to a legal settlement between Discover, Visa and MasterCard are also included in discontinued operations.

The firm notes that it has substantially reduced its leverage and strengthened its capital position. In its also reducing balance sheet-intensive businesses including a resizing of prime brokerage, exiting certain proprietary trading strategies, reducing principal investments and closing residential mortgage origination. It’s targeting an additional US$2 billion in cost savings including the annualized effect of the previously announced headcount reductions and additional non-compensation expense savings.

The firm is also developing a global strategic alliance with Mitsubishi UFJ Financial Group, Inc. and launching a retail banking group to build bank deposits.

“These exceptional market conditions profoundly impacted our performance this year, especially in the fourth quarter,” said John Mack, chairman and CEO. “However, we still achieved three quarters of profitable results and are moving aggressively to reposition the firm for the future – continuing to resize our business, reduce legacy assets and further strengthen our balance sheet and capital position, which today includes an industry-leading Tier-1 capital ratio.”

“The environment will continue to be challenging. But we have successfully evolved and adapted our business across numerous cycles, and the current market dislocation gives us openings – including through our strategic alliance with Mitsubishi UFJ – to build market share, seize new opportunities and ultimately deliver long-term value to our shareholders,” Mack added.

Nevertheless, credit rating agency DBRS placed its long-term ratings for Morgan Stanley Under Review with Negative Implications. “This rating action reflects the further deterioration in the company’s prospects since DBRS changed the trend on its long-term ratings to negative on September 17, after weak Q3 2008 earnings due to the sustained disruptions in the financial markets, the rapid deterioration in the U.S. economy, as well as the weakening of economies and financial markets around the world,” it said.

“In weathering the sustained turmoil of the past eighteen months, Morgan Stanley had managed to generate positive earnings in the first three quarters of 2008 after experiencing a significant loss in Q4 2007,” DBRS said. However, it said that this quarter’s loss “absorbs capital, impacts market confidence and elevates the market’s concerns about remaining risk.”

DBRS said it believes that Morgan Stanley has the necessary franchise strength, funding, liquidity and capital to successfully manage through the very challenging operating environment. “As a result of these factors and the increased level of government support, the ratings are unlikely to be downgraded by more than one notch and could be confirmed at the current level following the review,” it said.

IE