A Morgan Stanley securities joint venture in Japan with Mitsubishi UFJ Financial Group (MUFG) <8306.T> said it will lose nearly $2 billion after its fixed income traders took market positions which were larger than its financial fitness and then made wrong bets.
Mitsubishi UFJ Morgan Stanley Securities, 60 percent owned by Japan's MUFG and 40 percent by the Wall Street firm, said on Wednesday it would post a net loss of 145 billion yen ($1.7 billion) for the year ended March due to the trades.
It will also raise 30 billion yen through a capital injection from its parent Mitsubishi UFJ Securities Holdings.
The company said on Thursday it had been holding the trading positions which resulted in the loss at what was formerly Mitsubishi UFJ Securities, prior to its merger with Morgan Stanley.
Both banks had discussed these positions as part of its due diligence, and had agreed to keep it within a certain limit.
But the losses kept growing bit by bit, Managing Director Fumio Yoshimatsu told reporters. We did not have sufficiently detailed supervision of such things, he said.
He declined to give further details on what type of financial instruments were traded, but said they were incurred in January-March, and did not result from the March 11 magnitude 9.0 earthquake in northern Japan.
The company said the trades were made by Mitsubishi UFJ traders.
The unit is one of two securities ventures formed between MUFG and Morgan Stanley after Japan's largest lender acquired a 21 percent stake in the Wall Street firm for $9 billion in 2008.
It has been shedding staff since its start in May 2010, and said it will have lost 750 people by the end of this financial year.
Though the company did not say immediately whether heads will roll as a result of this loss, Yoshimatsu said any such decisions would be communicated when it reports earnings on April 28. It will however drastically cut back on proprietary trading in fixed income markets, executives said.
They also said that since its inception in May last year, the venture would have cut its headcount by 750 in the financial year started in April, including some who have already accepted early retirement. The venture had about 7,000 employees at the time of the start.
Yoshimatsu said the company will improve its risk management skills by learning from Morgan Stanley.
Another venture, Morgan Stanley MUFG Securities (MSMS), is made up of Morgan Stanley's sales, trading and capital markets divisions.
MUFG has 60 percent of economic interest and Morgan Stanley has 40 percent in MSMS. ($1 = 82.465 Japanese Yen)
(Writing by Abi Sekimitsu; Editing by Anshuman Daga)