Morgan Stanley's earnings dropped 57 percent in the second quarter as revenue from asset management and investment banking declined while equities and fixed-income traders generated less profit.

The second-biggest U.S. securities firm fell as much as 7.8 percent in New York trading after reporting that earnings from continuing operations sank to $1.03 billion, or 95 cents a share, from $2.36 billion, or $2.24, a year earlier. The sale of a Spanish wealth management business and part of the company's stake in equity index provider MSCI Inc. propped up the results.

Chief Executive Officer John Mack said in a statement that "difficult market conditions and lower levels of client activity" depressed earnings, as the firm suffered writedowns on bonds backed by real estate and leveraged loans and traders made bad bets with the company's money. Lehman Brothers reported its first loss in 14 years earlier this week and Goldman Sachs said yesterday that earnings fell for a second straight quarter.

"For Morgan Stanley, one of the challenges in modeling the company is they've had some pretty erratic trading results over recent quarters," Roger Freeman, an analyst at Lehman Brothers, who has an "equal weight" rating on the stock, said in a Bloomberg Radio interview. "It's a little tough to get behind those trading results and they seem to have been more negative than positive this quarter."

Debt Writedowns

Morgan Stanley dropped $2.14, or 5.3 percent, to $38.45 at 10:06 a.m. in New York Stock Exchange composite trading, after sinking as low as $37.42. The shares were down about 24 percent this year through yesterday, compared with the 23 percent decline of the 11-company Amex Securities Broker/Dealer Index. Goldman had fallen 17 percent and Lehman had slumped 62 percent.

Morgan Stanley's net income fell to $1.03 billion, or 95 cents a share, from $2.58 billion, or $2.45, a year ago. Revenue fell 38 percent to $6.51 billion in the three months ended May 30 and the firm's annualized return on equity, a measure of how well shareholders' money is reinvested, declined to 12.3 percent from 29.4 percent a year ago. That compares with Goldman's second-quarter return on equity of 20.4 percent.

Morgan Stanley's fixed-income revenue decreased 85 percent to $414 million, after losses of $436 million on mortgage- related trades and $519 million from leveraged loans and related hedges. Lehman reported a negative $3 billion of fixed-income revenue and Goldman's dropped 29 percent to $2.38 billion. All the firms are based in New York.