Morgan Stanley bolstered its trading operations, reshuffled its top management and tinkered with its strategy last year, but those changes are unlikely to bear fruit when the Wall Street bank reports its first-quarter earnings.

Meanwhile, rival Goldman Sachs Group Inc , which seems to have weathered the worst of the political storm over its post-bailout earnings bonanza, is poised to report another quarter of out-sized profits.

Both firms plan to report results later this month.

Goldman reported record earnings for 2009 as its trading desk led the charge. Morgan Stanley posted a full-year loss as it reduced risk after the financial crisis, ultimately causing it to miss out on much of the windfall trading profits.

Morgan Stanley also remade its management team in 2009, putting Co-President James Gorman at the helm as chief executive. It focused on integrating top retail brokerage Smith Barney, which it bought from Citigroup Inc , and hired hundreds of traders.

Morgan Stanley ceded a lot of ground that it shouldn't have in 2009, said FBR Capital Markets analyst Steve Stelmach. The assumption is that Morgan Stanley will start to gain some of that back in 2010. Time is going to tell.

TRADING MOMENTUM

Goldman had an unusually strong year from its fixed income trading operation in 2009 as wildly fluctuating markets triggered high trading volume. This generated hefty profits and fueled the firm's rebound from the financial crisis.

That trading spree slowed in the fourth quarter, making way for an uneven first quarter. Trading activity surged in January, faded in February, but picked back up in March.

As with Morgan Stanley, analysts have lowered first-quarter estimates for Goldman because of uncertainty about fixed income trading results.

Analysts are estimating a profit of 58 cents per share for Morgan Stanley, compared with a year-earlier loss of 57 cents. For Goldman, they expect earnings to show a rise to $4.02 from $3.39.

Analysts recently have gained comfort from signs that fixed income trading is trending upward. Swiss bank UBS gave credence to those hopes last week when it said it expected solid first-quarter fixed income revenue.

Buckingham Research Group analyst James Mitchell said in a recent research note that trading activity had been solid and big banks had benefited from rallying credit markets, stronger debt underwriting activity, continued stable housing data and increased interest rate derivatives activity.

But Mitchell also said trading was likely to be lower than a year earlier.

Goldman has been positioned to continue its strong trading performance even as conditions weaken, while Morgan Stanley -- which is rebuilding its trading ranks -- is finding it more of a struggle, analysts said.

Goldman has got the best trading operation in the world, bar none, said Rochdale Securities analyst Richard Bove. The Morgan Stanley people are trying to get there, and it will take four or five years to get where Goldman Sachs is.

ONE-OFFS

For now, Morgan Stanley is looking at a very messy first quarter, Bove said.

The substantial loss of its $1.2 billion investment in the Revel casino in Atlantic City is likely to impact the company's first-quarter results. [ID:nN02174858] Still, a $775 million settlement with Discover Financial Services to settle old claims should partly offset that loss. [ID:nN12234506]

Both Goldman and Morgan Stanley are likely to report less-than spectacular investment banking results as both the initial public offering and merger markets remained soft.

Morgan Stanley earnings could fall 3.7 percent below Wall Street estimates for the first quarter, according to StarMine's SmartEstimate, which weights estimates according to analysts' track records.

The SmartEstimate for Goldman is an upside surprise of 1.8 percent.

While Goldman saw robust profits in 2009, it was dogged throughout the year by public outrage over its ballooning bonus pool. Analysts said they would keep a close eye on the firm's compensation accrual, as Goldman now acknowledges that political risk could hurt its bottom line.

In 2009, the scrutiny over pay led Goldman to cut off employee compensation accrual after three quarters and boost shareholder returns.

Given a second year of scrutiny over pay, said FBR's Stelmach, maybe they'll readjust again. (Reporting by Steve Eder; Editing by Lisa Von Ahn)

Morgan Stanley