Morgan Stanley yesterday became the second Wall Street firm this week to suffer badly from the credit crunch, announcing a related $940 million (£469 million) writedown for its third quarter.

The adjustment, on the value of loans on its books and other financing commitments, came after the sub-prime crisis was transformed into a broader credit calamity and marks the bank’s first quarterly profits fall since John Mack returned as chairman and chief executive two years ago.

Morgan Stanley reported a 7 per cent drop in profit from continuing operations to $1.47 billion for the three months to September, as revenues rose by 13 per cent to $7.96 billion.

Investment banking revenues jumped by 45 per cent to $1.4 billion, asset management fees increased by 61 per cent to $1.36 billion and retail brokerage achieved revenues of $1.68 billion, up 23 per cent from the year before.

Morgan Stanley reported its profits a day after Lehman Brothers admitted that it had lost more than $700 million from the credit crisis in the third quarter. This translated into a 47 per cent drop in revenues in its fixed-income business, which left the group with a 3 per cent decline in net income, at $887 million.

Firms such as Morgan Stanley and Lehman Brothers have committed to provide about $320 billion worth of loans to back leveraged buyouts, many of which were agreed before the credit crunch took hold in July.

As a result, they are likely to suffer losses as they syndicate the debt on less favourable terms than they had anticipated when they agreed to arrange the financing.

Morgan Stanley said that $726 million of its writedown related to declines in the value of its buyout financing “pipeline”, which represented $31 billion of financing commitments at the end of its third quarter. Lehman Brothers had $27 billion of commitments at the same time.

David Sidwell, Morgan Stanley’s chief financial officer, said “there were amazing market disruptions during this quarter” and that the present credit crisis was worse than the fallout from Russia’s debt default and the collapse of the Long Term Capital Management hedge fund in 1998. Colm Kelleher, Morgan Stanley’s global head of capital markets, who will succeed Mr Sidwell when he retires at the end of the year, added: “The price movement, the lack of liquidity, the behaviour of hedges in August was clearly very stressed and pronounced, but I do believe the worst is over.

“We’re seeing some clear signs of recovery. This will take some time to work through the credit markets. I would suspect you’re talking about one to two quarters.”

Goldman Sachs and Bear Stearns will report third-quarter results today.

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