Moody’s Investors Service today downgraded the long-term ratings of Morgan Stanley and its major subsidiaries, citing risk management concerns. The outlook on all ratings is stable.

The rating agency said that the downgrade, “reflects Morgan Stanley’s risk management miscues and a risk appetite which resulted in operating performance which has been below Moody’s expectations during the credit crisis.” It reported that, over the past year, excluding recent gains from asset sales and credit spread widening on its own obligations, Morgan Stanley has reported a pretax loss of about US$3 billion.

“The size of trading losses in the past year has reduced our confidence in Morgan Stanley’s risk controls — this is the primary driver of the downgrade,” stated Peter Nerby, a Moody’s senior vice president. Morgan Stanley took on positions that proved difficult to unwind when markets became volatile and illiquid and produced a high levels of earnings volatility, the rating agency observed.

“Morgan Stanley’s business model results in the periodic assumption of concentrated and complex positions, which requires both a strong capital base and dynamic risk management,” Nerby said. Moody’s noted that Morgan Stanley is instituting several changes to risk management, including adding new professionals with enhanced authority, centralizing control, and designing additional stress tests.

Moody’s added that the firm has a strong capital position that partially compensates for risk management concerns and supports the rating. Also, the stable outlook is based on Morgan Stanley’s profitable and diversified franchises in investment banking, capital markets, commodities trading and prime brokerage, which is supplemented by an improved retail brokerage business and asset management. Moody’s expects that the diversity of these franchises will enable the firm to produce solid profitability for the balance of 2008 and 2009, even as certain capital markets stay challenging. Moody’s also observed that Morgan Stanley retains a strong liquidity profile.