Fri Jan 18, 2013 4:06pm EST

n">(Reuters) - Morgan Stanley Chief Executive James Gorman said the bank has turned itself around and can meet its goals for profitability, his boldest pronouncement yet about the near-term potential for a company that has long lagged its peers.

The investment bank and wealth manager on Friday posted fourth-quarter earnings that beat analysts' average estimate by a wide margin, helped by a big jump in trading revenue and stronger performance in its wealth management group.

Morgan Stanley's fixed-income trading business performed worse than its rivals, and its overall return on equity, a measure of how efficiently the bank wrings profit from shareholder money, was less than half that of Goldman Sachs Group Inc. But Gorman told investors the bank was "working aggressively" to improve its return on equity.

In current market conditions, the bank's return on equity can reach 10 percent, Gorman said on a conference call. Analysts said the figure is the bare minimum that many investors demand, but it is far above Morgan Stanley's recent performance, and Gorman's statement marks the first time Morgan Stanley has said it can meet that goal even if business doesn't pick up.

"After a year of significant challenges, Morgan Stanley has reached a pivot point," Gorman said in a statement. "Our firm is now poised to reach the returns of which it is capable on behalf of our shareholders."

Morgan Stanley's stock climbed as much as 8.2 percent on Friday, to $22.46, the highest price since August 2011 and marking the biggest intraday jump since June, before closing at $22.38.

"I think Morgan Stanley has turned the corner," said Joe Terril, president of St. Louis-based money manager Terril & Co, which invests in bank stocks. "I believe they'll gradually improve quarter after quarter -- it's not a one-time event."

Morgan Stanley said its wealth management division delivered a 17 percent pretax profit margin in the quarter, exceeding an internal target months ahead of schedule.

The wealth management division is closely watched by investors because Gorman is staking the future of the bank on it, arguing that more stable returns there will help offset volatility from trading and investment banking.

Morgan Stanley is one of several Wall Street banks using layoffs and compensation cuts to help boost its bottom line. The firm paid out 44 percent of adjusted revenue to employees in its securities and investment banking business last year, down from 53 percent in 2011, Chief Financial Officer Ruth Porat said in an interview.

Across the entire company, compensation costs fell by $711 million, or 4 percent, in 2012 as Morgan Stanley cut nearly 5,000 employees from its payroll.

One senior employee might decide to leave. The Obama administration is considering Porat for a position as Treasury deputy secretary, a source familiar with the matter told Reuters, which could leave Morgan Stanley shuffling the decks in top management. Porat would not comment.

Overall, the bank reported fourth-quarter income from continuing operations of $573 million, or 28 cents per share, compared with a loss of $222 million, or 13 cents per share, in the year-ago period, when it took a big one-time charge.

Excluding a charge related to changes in the value of Morgan Stanley's debt, the bank earned $894 million, or 45 cents per share. On that basis, analysts' average forecast was 27 cents per share, according to Thomson Reuters I/B/E/S.

In sales and trading, adjusted revenue more than doubled from a year earlier, to $2 billion from $867 million. Fixed-income, currency and commodities trading revenue was $811 million, adjusted for accounting charges, compared with a loss of $493 million a year earlier.

Glenn Schorr, an analyst at Nomura, said Morgan Stanley's fixed-income currency and commodities trading business posted an increase of 26 percent in adjusted revenue, while peers reported an average gain of 43 percent.

The division suffered because of historically weak revenue in commodities trading, which faced unexpected price movements related to weather and lower prices in its storage business. The unit reported its worst results since 1995, Gorman said on CNBC.

Curbs on banks trading with their own money and the impact of fracking lowering prices for certain commodities have eaten into banks' profits in commodities, a once-lucrative trading business for Wall Street.

Merger advisory revenue rose 12 percent to $454 million, while stock and bond underwriting revenue rose 62 percent to $771 million.

Morgan Stanley is the last big U.S. bank to report earnings this week. Rival Goldman Sachs on Wednesday said it cut compensation costs 11 percent in the fourth quarter, helping boost returns to shareholders.

(Additional reporting by Anil D'Silva in Bangalore and Rachelle Younglai in Washington; Editing by Supriya Kurane, John Wallace and Leslie Adler)

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Wed Dec 26, 2012 2:51pm EST

n">(Reuters) - Falling off the "fiscal cliff" is a bad thing, right?

Not necessarily for some state governments that could begin collecting more in estate taxes on wealth left to heirs if the United States goes over the "cliff," allowing sharp tax increases and federal spending cuts to take effect in January.

In an example of federal and state tax law interaction that gets little notice on Capitol Hill, 30 states next year could collect $3 billion more in estate taxes if Congress and President Barack Obama do not act soon, estimated the Urban-Brookings Tax Policy Center, a Washington think tank.

The reason? The federal estate tax would return with a vengeance and so would a federal credit system that shares a portion of it with the 30 states. They had been getting their cut of this tax revenue stream until the early 2000s. That was when the credit system for payment of state estate tax went away due to tax cuts enacted under former President George W. Bush.

With the return of the credit system next year as part of the "cliff," states such as Florida, Colorado and Texas - which have not collected estate tax since 2004 - could resume doing so. California Governor Jerry Brown has already begun to add the anticipated estate tax revenue into his plans, including $45 million of it in his 2012-2013 revised budget.

Brown may or may not be jumping the gun.

CLOUDY CLIFF AHEAD

The outlook on the "fiscal cliff" coming up at year-end is uncertain. Democratic President Barack Obama has said he hopes for a last-minute deal to avert it. That would need to get done soon, with Congress just now coming back from its holiday break.

Chances of an agreement became more remote last week after Republicans in the U.S. House of Representatives fumbled their own legislative attempt to prevent the fiscal jolt that economists say could trigger a recession.

House Speaker John Boehner abruptly adjourned the chamber for the holidays after failing to gather the votes from within his own party to pass legislation he and other Republicans had drafted, after walking out of negotiations with Obama.

Weeks of inconclusive political drama over the "cliff" have focused largely on individual income tax rates and spending on federal programs such Medicare and Social Security, but many tax issues are also involved, including the estate tax.

At the moment, under laws signed a decade ago by Bush, the estate tax is applied to inherited assets at a rate of 35 percent after a $5 million exemption. That means a deceased person can pass on an inheritance of up to $5 million before any tax applies. Inherited wealth passed to a spouse or a federally recognized charity is generally not taxed.

Obama wants to raise the rate to 45 percent after a $3.5 million exemption. Republicans have called for complete repeal of the estate tax, which they call the "death tax," though Boehner earlier this month called for freezing the estate tax at its present level. It was difficult to determine what the Republicans want after last week's events in the House.

STATES STAND TO GAIN

If Congress and Obama do not act by December 31, numerous Bush-era tax laws will expire, including the one on estate taxes. That would mean the estate tax rate will shoot up next year to the pre-Bush levels of 55 percent after a $1 million exemption.

It would also mean that for the first time in years, a portion of that estate tax would go to the states, through the return of the credit system.

Under that old law, estates paying the tax could get a credit against their federal tax bill for state estate tax payments of up to 16 percent of the estate's value.

If the fiscal cliff were allowed to take hold unaltered by Washington, 30 states would again automatically begin getting their share of federal estate taxes. The state laws are generally written so the state estate tax amounts are calculated under a formula based on the amount of the federal credit.

This would help states that have struggled with lower tax revenues since the 2007-2009 financial crisis and resulting recession, according to research by the Pew Center on the States, though painful federal spending cut backs would also hurt the states.

(Editing by Kevin Drawbaugh and Cynthia Osterman)

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1 of 10. Visitors look at Raphael's ''Auxiliary cartoon for the Head of a Young Apostle from 1519-1520 which has an estimated value of £10 to £15 million (US$16 - $24 million) at Sotheby's London October 8, 2012.

LONDON | Tue Oct 9, 2012 10:02am EDT

LONDON (Reuters) - The most surprising thing about this year's Frieze art week, which puts London at the cutting edge of the contemporary art world every October, is that there is so much old art around.

The annual Frieze Art Fair will go ahead as usual in a giant marquee in Regent's Park, a grid of 175 galleries teeming with potential buyers and thousands of contemporary art lovers keen to keep up with the latest trends in a fast-moving world.

And there are the spin-off events across the capital designed to lure the world's wealthiest buyers - auctions, rival fairs, parties, gallery openings, exhibitions and discreet viewings far from the hullabaloo.

But unlike previous editions, the October 11-14 fair this year comes with a separate Frieze Masters event featuring 96 galleries offering works from across the last 4,000 years.

The reasons for the shift are both commercial and cultural.

Organizers and exhibiting galleries are hoping for more crossover business between contemporary art collectors and those more interested in older works.

They also want to explore art's relationship with the past, representing an acceptance that what came before should be appreciated as well as challenged by iconoclastic young artists.

"I suppose what makes it interesting is what's come out of conversations with contemporary artists," said Victoria Siddall, director of the new fair. "It becomes apparent that a lot of them are looking at works that were made a long time ago.

"All galleries are interested in meeting new clients," she told Reuters. "There are old master and contemporary galleries, and I hope there will be a crossover. It would be great to broaden people's horizons in terms of what they collect."

"MEDICI" BUYERS

That crossover is already happening.

Among the most coveted clients for auction houses and galleries are so-called "Medici"-style buyers who acquire art across different periods and genres.

Sotheby's said 30 percent of buyers at its old master drawing sales had also bought art at its contemporary auctions, compared with seven percent in 2007.

It is no coincidence that it is displaying Raphael's 1519 "Head of an Apostle", which is worth up to $24 million, alongside Jackson Pollock, Francis Bacon and Gerhard Richter at its London headquarters this week.

Artists are also embracing Frieze's shift to the past.

The fair has organized a series of conversations bringing together leading contemporary artists with major curators.

On Thursday, London-born contemporary painter Cecily Brown talks with National Gallery director Nicholas Penny who is more used to talking about Raphael than Richter.

For Matthew Slotover, who with Amanda Sharp started Frieze Art Fair in 2003 and launched a New York edition this year, the new-look format was a way of keeping the event fresh.

"We think it's always good to innovate and try new things, as it keeps people interested and excited and us interested and excited too," he told Reuters.

"What we thought we could do with (Frieze Masters) was to animate all of this art that was radical when it was made."

RIVAL FAIRS

Rival fairs like PAD London, held in the exclusive Berkeley Square from October 10-14 and best known for showcasing 20th century art and design, will also delve into the past.

Galerie Mermoz, based in Paris, will present tribal art including a ceremonial head of Hacha representing the god Xipe Totec, dated 450-750 AD, from Mexico.

Modern PAD highlights include Alexander Calder's 1943 "Constellation with Red Knife" valued at $3.5 million.

Sotheby's offers Richter's "Abstraktes Bild (809-4)" for $14-19 million at its contemporary auction on October 12.

The painting has the added buzz of belonging to guitarist Eric Clapton who bought it and two other works by the German artist for $3.4 million in 2001.

That kind of price rise underlines how the top end of the art market has largely defied broader economic gloom.

Auction records have tumbled as buyers from the Middle East, Russia and China snap up top lots for private collections, long-term investments or to fill new museums and galleries.

"There's a lot of confidence in London at the moment," Slotover said of the art market. "London is a brilliant gateway to the rest of the world."

Not everyone is celebrating the boom.

Benedict Silverman, whose $160 million collection of works from early 20th century Germany and Austria is being sold for charity, blamed "speculators" for driving prices higher and making life difficult for collectors like himself.

"The prices paid these days are for trophies, not for art," he said.

"I think there is a bubble and I can't wait for it to break as real collectors are interested in the art, not the price."

(Reporting by Mike Collett-White, editing by Paul Casciato)

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