Morgan Stanley last night became the latest Wall Street bank to quantify its losses from the sub-prime mortgage crisis, forecasting a write-off of $3.7 billion (£1.8 billion) against fourth-quarter revenues.

The announcement came as Merrill Lynch, its embattled rival, admitted that the US Securities and Exchange Commission (SEC) had launched an investigation into matters relating to its holdings of high-risk mortgages.

The forecast from Morgan Stanley, which follows mounting speculation of big writedowns, noted that the bank had $12.3 billion in US sub-prime debt.

Its net exposure if all its debts go sour is $6 billion.

Morgan Stanley is the latest Wall Street investment firm to admit to substantial losses.

There has been an estimated $55 billion of losses suffered by financial institutions so far this year, with American International Group (AIG) last night reporting a $2.68 billion after-tax write-down of assets in the third quarter.

Morgan Stanley, which has in the past derived a substantial proportion of its income from its advisory and equity underwriting businesses, has recently become a major firm in the mortgage-backed securities business.

Sub-prime mortgages were taken up by Americans with poor credit histories and low incomes and the rising number of defaults has triggered the crisis in the banking industry.

The SEC inquiry into Merrill Lynch comes as the bank steps up the search for a replacement for Stan O’Neal, who resigned last month as a result of the bank’s debt problems.

The bank is thought to have drawn up the same shortlist of external candidates as Citigroup, which is looking for a permanent replacement for Charles “Chuck” Prince, who stepped down on Sunday.

Both banks are believed to have identified the following candidates: John Mack, the Morgan Stanley chief executive; John Thain, the head of the New York Stock Exchange; Larry Fink, the chief executive of Black Rock fund managers; Robert Willumstad, the chairman of AIG; and Josef Ackermann, the head of Deutsche Bank.

Both ousted their chief executives after being forced to admit far bigger than expected losses arising from bond investments backed by sub-prime mortgages.

However, the positions of both Mr Mack and Mr Willumstad will now come under scrutiny after last night’s revelations.

Wall Street recruitment firms are predicting that bonuses, usually paid after Christmas, will show the first drop in five years.

One head-hunting firm, Options Group, has forecast that bonuses will decrease by between 5 per cent and 10 per cent this year as a result of the credit crisis.

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