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Bank of England Deputy Governor John Gieve said investors are still facing “acute'' stress as market declines force hedge funds to sell assets.

“The financial system remains under acute strain,'' Gieve said in a speech in London today. “The falls in equity markets, corporate bond prices and the prices for leveraged loans is hitting both long-term institutional investors and leveraged investors, including hedge funds.''

The Bank of England said in a semi-annual report that $2.8 trillion in banking losses and the threat of a global recession are increasing risks to financial stability. Meanwhile, Prime Minister Gordon Brown yesterday suggested he may scrap decade- old fiscal rules to prop up the banking system as the nation faces its first recession since 1991.

Investment losses at hedge funds and insurers pose further risks to the system, the central bank's report said, as insurers may fall short of capital requirements and face credit rating downgrades, while hedge funds may be forced to sell assets.

“Some are being forced to sell into a falling market in response to margin calls and redemptions,'' Gieve said. “And there are growing signs of stress in many emerging market economies.''

The International Monetary Fund predicts the world's advanced economies will next year grow at the slowest pace since 1982. Investors stung by losses from developed nations have sold riskier emerging-market assets, jeopardizing the position of those nations. The IMF has agreed to emergency loans for Ukraine and Hungary, while Belarus and Pakistan are seeking help one hour cash loan.

Repossessions

In the U.K., the economy recorded its first quarterly contraction in 16 years in the three months through June, while the central bank said a 15 percent drop in house prices may push 10 percent of mortgage-holders into negative equity. That happens when the value of a home falls below the amount owed on the mortgage.

Repossessions of British homes jumped by 71 percent in the second quarter, the U.K. financial regulator said today.

Brown this month unveiled a 50 billion-pound rescue plan, which included the government buying stakes of Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group Plc after money-market tensions undermined investors' confidence in banks around the world.

“The package of measures introduced in the U.K. and elsewhere has improved the prospects significantly, especially for banks, but it is too soon to declare the crisis over, Gieve said. “We need to establish stronger restraints on the build up of risks in the financial system over the cycle with the dangers they bring to the wider economy.''

The Spanish system, which requires banks to build up loss reserves when the economy is booming, may serve as a lesson for others to follow, as it diminishes the need to raise capital in a downturn, Gieve said.

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SAN FRANCISCO — Gasoline prices may be falling fast from record highs, but travelers are still avoiding the highways and jumping on buses and trains at a record pace, according to a report from the U.S. Department of Transportation.

In fact, Americans drove 15 billion fewer miles in August than they did in the same month a year ago, according to federal data.

That represents a 5.6 percent decline from August 2007, marking the biggest year-over-year decline ever recorded, U.S. Secretary of Transportation Mary Peters said in a statement.

At the same time, public transit ridership jumped 6.2 percent across the country this summer compared with a year ago.

Peters pointed out that Texas, where she spoke during a visit to a light-rail station under construction in Dallas, saw an increase of 15 percent in its DART rail system.

All this with gas currently costing a national average $2 http://payday-z.com.78 for a gallon of regular unleaded, according to recent numbers from AAA. That’s down almost a dollar from a month ago and is more or less the same as it cost in October 2007.

The surprising trend, likely exacerbated by the dismal state of the economy, is making it difficult for the government to pick up the tab. Peters warned that the lower income from gas taxes will make it difficult for the federal agency to continue to fund future projects.

"We pay for transit the same way we pay for road and bridge projects — with federal gas taxes," she said. "Relying on the gas tax is like relying on cardboard to keep the rain out — the longer you use it the less it works."

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Chinese President Hu Jintao said maintaining his country's economic growth rate, the fastest among major economies, is the best way to combat a credit crisis that threatens a global recession.

“The fundamentals of the Chinese economy have not changed,'' Hu said at the opening of a biennial summit of Asian and European leaders today in Beijing and after China reported its slowest growth in five years in the third quarter. “We must first and foremost run our own affairs well.''

The two-day Asia-Europe Meeting, known as ASEM, is the first between Asian leaders since bank failures, plunging stock markets and weakening currencies amplified fears that the world is headed for a prolonged economic decline. China was pressed ahead of the meeting to get more involved in combating the crisis by attendees, including European Commission President Jose Barroso.

“It is an obligation for us to work together,'' French President Nicolas Sarkozy said during a speech at the opening ceremony, where he appealed for support for European efforts to ease the crisis. “Europe needs Asia, it needs Asia's growth, Asia's intelligence and its creativity.''

China is seen as key to any global response because it has the world's fastest-growing major economy and $1.9 trillion of currency reserves, an amount larger than Canada's gross domestic product.

Credit Freeze

Credit markets have frozen worldwide amid $660 billion in mortgage-related losses that have forced central banks to pump $2 trillion into bailouts for failing financial institutions. The benchmark MSCI Asia Pacific Index has plunged 49 percent this year.

China “appreciates'' measures taken by other countries and pledged to coordinate policy to help cope with financial turmoil, Hu said. China also called for increased international cooperation to create a “fair and equitable'' global financial system and urged the International Monetary Fund to increase its surveillance, according to a statement from the Ministry of Finance.

A draft agreement from summit leaders on the financial crisis echoed China's wishes, saying the IMF should “play a critical role'' in assisting countries affected by the crisis, according to a copy published by Reuters.

China has also agreed with 10 Southeast Asian nations, along with Japan and South Korea, to finalize a proposed $80 billion fund to shore up Asian exchange rates by the end of the year, Surin Pitsuwan, Secretary General of the Association of Southeast Asian Nations, said in an interview with Bloomberg Television freecreditreport.

China's Response

The ASEM meeting is one of several in the coming weeks that will focus attention on China's response to the crisis.

President George W. Bush has invited leaders from the Group of 20 industrialized and developing nations — including China - -to attend a Nov. 15 summit in Washington, 11 days after the U.S. presidential election.

Finance ministers from the Asia-Pacific Economic Cooperation group gather in Trujillo, Peru, starting Nov. 6. APEC's heads of state get together in Lima on Nov. 22. The G- 20's finance ministers and central bank governors convene in Sao Paulo beginning on Nov. 8.

Thailand has proposed that China ease currency-conversion restrictions to facilitate the pooling of reserves and create a $350 billion fund to protect the region's currencies and buy stocks and bonds, said Thailand's Deputy Prime Minister, Olarn Chaipravat, in an interview in Bangkok on Oct. 22.

“The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, relative to anybody, to be the rightful and anointed convertible currency of the world,'' he said.

Crisis Lessons

Lessons from the Latin American debt crisis and Asian financial crisis are that mechanisms must be put in place rapidly to aid vulnerable markets, and China is one of the few countries with resources to play a leadership role, wrote Citigroup Inc. Senior Vice Chairman William Rhodes in the Financial Times.

China will be forced to take proposals from other Asian countries seriously, said Steve Tsang, a fellow in modern Chinese studies at St. Anthony's College, Oxford, U.K.

“If the region is financially destabilized, it will have more of an impact on China'' than the banking crisis in the U.S. and Europe, where a slowdown in consumer spending may choke off demand for Chinese products, Tsang said.

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DETROIT (AP) — General Motors Corp. and Chrysler LLC have held preliminary talks about a merger or an acquisition of Chrysler by GM, according to published reports Saturday.

The Wall Street Journal, citing people it described as familiar with the discussions, said Cerberus Capital Management, the private equity firm that owns 80.1 percent of Chrysler and 51 percent of GMAC Financial Services, proposed trading Chrysler’s automotive operations to GM. The Journal said Cerberus would receive GM’s remaining 49 percent stake in GMAC.

The New York Times, also citing people familiar with the talks, said the automakers were discussing a merger. The Times did not mention GMAC, a traditional auto lender hit hard by the housing market downturn.

The talks have stalled because of the recent turmoil in the financial markets, according to the Journal. Its sources said negotiations could resume if markets stabilize because both GM and Cerberus want to quickly divest the assets under discussion.

The negotiations between 100-year-old GM and 83-year-old Chrysler began more than a month ago, according to the Times. Its sources said the chances of a merger were "50-50" as of Friday and likely would take weeks to complete.

Both newspapers posted their stories on their Web sites late Friday.

"Without referencing this specific rumor, as we’ve often said, GM officials routinely discuss issues of mutual interest with other automakers," GM spokesman Tony Cervone said.

Chrysler spokeswoman Shawn Morgan declined comment.

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European officials squabbled over how to respond to the global credit crunch, with Germany opposing a coordinated approach and the Netherlands calling on states to set aside funds to help troubled banks.

French President Nicolas Sarkozy distanced himself from comments by his finance minister Christine Lagarde over the need to set up a “rescue fund.'' Luxembourg Prime Minister Jean- Claude Juncker told DeutschlandRadio today he didn't “see the need'' for an effort to emulate the $700 billion rescue package that U.S. senators passed yesterday.

The conflict undermined efforts to build a consensus European strategy to counter the financial crisis as a recession looms. Other fissures emerged, as Ireland's decision to guarantee bank deposits and debts prompted criticism by British bankers yesterday that it “distorted competition.''

“I cannot see a common response,'' Jean Peyrelevade, former chief executive officer of French bank Credit Lyonnais SA, now owned by Credit Agricole SA, said in an interview. “For this crisis it's too late to build a common response.''

Fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy hit Europe this week, with Germany, France, Belgium, Luxembourg, Iceland and the U.K. rescuing five lenders and Italian Prime Minister Silvio Berlusconi pledging to prevent losses for depositors.

Euro Weakens

The euro tumbled against the dollar amid the infighting among European leaders. The Senate's vote in favor of the rescue plan for financial companies today also gave the dollar a boost. The euro fell to $1.3884 per euro at 13:05 p.m. in Frankfurt, near a one-year low, from $1.4009 yesterday in New York.

Dutch Prime Minister Jan Peter Balkenende will discuss his plan for European Union nations to create accounts to support their finance industry when he meets Sarkozy in Paris today, Dutch Finance Ministry spokeswoman Hendrieneke Bolhaar said.

“If all European countries reserve funds, it will add up to hundreds of billions of euros and that provides trust to Europeans,'' Dutch Finance Minister Wouter Bos told parliament today. “The funds will be strictly national, although we need to reach consensus over when to use them.''

In the U.S., Treasury Secretary Henry Paulson proposed a $700 billion bailout on Sept. 20 that lawmakers are struggling to pass. The House of Representatives rejected a version of the plan three days ago. Senators who approved the package urged opponents in the House to drop their objections.

`Non-Starter'

A European version of the Paulson plan is a “non-starter'' because of competing agendas and coordination difficulties, Klaus Baader, chief European economist at Merrill Lynch and Co. in London, said in a Sept. 29 report. Still, he expects increased cooperation among governments confronting the crisis.

The disagreements will be aired at an Oct. 4 meeting called by Sarkozy in Paris with Juncker, leaders of Great Britain, Italy and Germany, as well as European Central Bank President Jean-Claude Trichet.

Lagarde told the German newspaper Handelsblatt in an interview today that a “rescue package'' was needed to help “smaller'' European states “threatened with a banking failure.'' Germany opposes the proposal “based on its current assessment of risk,'' said Finance Ministry spokesman Stefan Olbermann (no fax cash advance) http://paydayloans-on.com.

“We see no need for a fund,'' Olbermann said today.

Reuters reported that the fund would total 300 billion euros ($420 billion), citing an unnamed European government official.

Sarkozy Denial

Speaking to reporters today in Paris, Sarkozy said he “denied the amount and the principle'' of such a fund.

“Everyone is working very well together,'' Lagarde told reporters in Paris today.

The specifics of a coordinated plan notwithstanding, Germany rejects a Europe-wide approach to bank rescues, said Torsten Albig, another finance ministry spokesman.

“The idea of applying one solution, one big bang'' should the banking crisis spread “is not practicable and would create new, enormous problems,'' he told reporters yesterday in Berlin. “The tailor-made solution is the right way.''

That contrasts with pleas from European Union officials for less unilateral action. Charlie McCreevy, EU financial-services commissioner, yesterday proposed more coordinated oversight and rules that banks hold additional capital for asset-backed bonds.

“Capital and strong financial institutions are the lifeblood of an economy,'' McCreevy said in a Bloomberg Television interview in Brussels.

Money Markets

As banks hoarded cash, the Libor-OIS spread, a gauge of cash scarcity, widened for an eighth day. The difference between the three-month London interbank offered rate for dollars and the overnight indexed swap rate widened 7 basis points to 254 basis points as of 8:44 a.m. in London. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze spurred by the U.S. subprime- mortgage crisis began.

The credit-market turmoil may require a more comprehensive approach in Europe, the Organization for Economic Cooperation and Development said yesterday.

“Considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don't improve on the other side of the Atlantic,'' OECD Secretary General Angel Gurria said in Paris. “The piecemeal approach may not work in Europe either.''

A group of economists including Alberto Alesina of Harvard University and Klaus Zimmerman of Berlin's DIW economic institute appealed for an EU initiative to recapitalize banks.

`Once-in-a-Lifetime'

“This is a once-in-a-lifetime crisis,'' the 10 academics said in an emailed statement. European leaders need to tackle the bank industry's crisis “head on before it spirals out of control.''

One proposal is for European countries to follow Ireland, either as a bloc or individually, in guaranteeing banks' deposits and debts. Spain's Finance Ministry today said it supports strengthening EU protections of deposits. Berlusconi and Sarkozy have already pledged to prevent losses for depositors.

The advantage of such a program would be that it would boost confidence among banks and give them time to resolve their problems, although it would also put taxpayer funds at greater risk, economists at Royal Bank of Scotland Group Plc. said in a report today.

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Australian employers hired almost three times as many workers in August as economists forecast, adding to evidence a mining boom is helping offset weaker domestic demand.

The number of people employed rose 14,600 last month, the statistics bureau said in Sydney today. The median estimate of 25 economists surveyed by Bloomberg News was for a 5,000 gain. The jobless rate fell to 4.1 percent from 4.3 percent.

Australia's currency rose on speculation the lowest unemployment rate in five months reduces the central bank's scope to cut borrowing costs again this year. Governor Glenn Stevens reduced the benchmark last week for the first time in sevens years and said policy makers were now questioning whether to cut again or hold.

“This reinforces the idea that while the Reserve Bank is looking to make policy less restrictive, they're not about to race to an expansionary footing,'' said Andrew Hanlan, a senior economist at Westpac Banking Corp. in Sydney.

The Australian dollar rose to 80.05 U.S. cents at 12:35 p.m. in Sydney from 79.61 cents before the report was released. The two-year government bond yield climbed 7 basis points, or 0.07 percentage point, to 5.60 percent.

The S&P/ASX 200 Index of stocks narrowed its losses. It was down 1.1 percent to 4,850.10 at 12:36 a.m. in Sydney, up from a low of 4,834.2 before the report.

Full-Time Jobs

The number of full-time positions rose 7,500 in August and part-time jobs increased 7,200. About half of the nation's 21 million people are employed. The August employment gain followed a revised increase of 18,700 jobs in July.

Demand for skilled labor at companies including BHP Billiton Ltd., which is expanding mines to meet Chinese orders for iron ore, is helping generate new jobs in the states of Western Australia and Queensland, where unemployment fell in August to 2.8 percent and 3.3 percent respectively.

By contrast, Australia's most populous state, New South Wales, saw an increase in its jobless rate to 4.9 percent from 4.7 percent. The rate was 4.3 percent in Victoria, 4.4 percent in South Australia and 4 percent in Tasmania.

Concern that demand for skilled labor would stoke wage increases and inflation was a key reason central bank policy makers increased borrowing costs twice this year to a 12-year high. They reduced the benchmark rate by a quarter point to 7 percent on Sept. 2.

Rate Outlook

“In the near term, the question will be do we hold here or go down a bit more'' on interest rates, Stevens told parliament's economics committee in Melbourne this week faxless cash advance.

Investors reduced bets that Stevens will cut the benchmark again on Oct. 7, according to a Credit Suisse Group index based on trading in interest-rate swaps. They forecast an 80 percent chance of a reduction, the index showed at 12:15 p.m. in Sydney, down from 90 percent before the report was released.

There are signs that businesses reliant on household spending are starting to review hiring plans. Fairfax Media Ltd., Boeing Co., Ford Motor Co., Starbucks Corp. and Australia & New Zealand Banking Group Ltd., all announced job cuts in Australia last month. Qantas Airways Ltd., the nation's biggest airline, will fire 1,500 workers.

“Don't get too excited — the unemployment rate has fallen because the participation rate dropped slightly,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. “Moreover, the leading indicators of employment suggest that the jobless rate will rise gradually.''

Business Confidence

Job-vacancy advertisements fell 4.9 percent in August, the biggest drop in more than seven years, according to an ANZ Bank report released on Sept. 8. Businesses confidence is also close to the lowest level since the 2001 terrorist attacks in the U.S.

The participation rate, which measures the labor force as a percentage of the population aged over 15, fell to 65.2 percent in August from 65.3 percent in July, today's figures showed.

Gross domestic product rose 0.3 percent in the three months through June 30, the smallest gain since the fourth quarter of 2004, as consumers cut spending by 0.1 percent, a report showed last week.

The jobless rate will rise “a bit'' over the next year to 18 months, Governor Stevens said this week. “The rate of employment growth will slow. It is starting to do that already,'' he said.

Today's unemployment report was compiled by the statistics bureau using a sample of businesses that has been cut by 24 percent. The bureau, which reduced the survey because of budget cuts, has said it will increase the volatility of the figures.

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Regulators on Friday shut down Silver State Bank, saying the Nevada bank failed because of losses on soured loans, mainly in commercial real estate and land development.

It was the 11th failure this year of a federally insured bank.

Nevada regulators closed Silver State and the Federal Deposit Insurance Corp. was appointed receiver of the bank, based in Henderson, Nev. It had $2 billion in assets and $1.7 billion in deposits as of June 30.

Andrew K. McCain, a son of Republican presidential nominee John McCain, sat on the boards of Silver State Bank and of its parent, Silver State Bancorp, starting in February but resigned in July citing "personal reasons," corporate filings with the Securities and Exchange Commission show. Andrew McCain also was a member of the bank’s audit committee, responsible for oversight of the company’s accounting.

The younger McCain, who is the chief financial officer of Hensley & Co., the beer distributorship of which Cindy McCain is chairwoman, is the Arizona senator’s adopted son from his first marriage.

Andrew McCain’s position on the Silver State board and departure were first reported Friday by The Wall Street Journal online.

Silver State Bank ran into difficulty because of a substantial amount of "poor-quality loans primarily related to real estate development" in southern Nevada and other distressed markets, FDIC spokesman David Barr said.

"When the housing market slowed down, people who bought raw land to build new homes didn’t need that land so they couldn’t do anything with it and repay their loans. So those loans went bad," Barr said.

Silver State Bancorp recently reported a net loss for the second quarter of $73.2 million, or $4.84 a share, compared with net profit of $6.2 million, or 44 cents a share, in the same period last year.

Construction and development loans have been the fastest-growing category of troubled loans for U.S. banks, and many banks have heavy concentrations of them in their lending portfolios, according to the FDIC. Some small banks are considered especially vulnerable. Delinquent loan payments and defaults by commercial and residential developers have surged to the highest levels since the early 1990s - the latter part of the savings and loan crisis.

The FDIC said Silver State Bank’s insured deposits will be assumed by Nevada State Bank of Las Vegas. Its branches will reopen Monday as offices of Nevada State Bank in Nevada and National Bank of Arizona in Arizona.

The agency said depositors of Silver State Bank will continue to have full access to their deposits.

The 11 failures so far this year compare with three for all of 2007, and federal banking officials have said that more banks are in danger of collapse.

Silver State Bank has operated 13 branches in the greater Las Vegas area and four in the greater Phoenix-Scottsdale area of Arizona as well as loan offices in Nevada, Utah, Colorado, Washington, Oregon, California and Florida.

The FDIC estimated its resolution will cost the deposit insurance fund between $450 million and $550 million.

Regular deposit accounts are insured up to $100,000.

There were about $20 million in uninsured deposits held in roughly 500 accounts at Silver State that potentially exceeded the insurance limit, the FDIC said.

Concern has been growing over the solvency of some banks amid the housing slump and the steep slide in the mortgage market cash till payday. The pressures of tighter credit, tumbling home prices and rising foreclosures have been battering many banks, large and small, across the nation.

The largest bank failure by far this year has been that of savings and loan IndyMac Bank, which was seized by regulators on July 11 with about $32 billion in assets and deposits of $19 billion.

The seizure of Pasadena, Calif.-based IndyMac, which was the largest regulated thrift to fail in the United States, prompted hundreds of angry customers to line up for hours in Southern California to demand their money. IndyMac also was the second-largest financial institution to close in U.S. history, after Continental Illinois National Bank in 1984.

The FDIC has been operating the bank, now called IndyMac Federal Bank, under a conservatorship.

The FDIC plans to raise insurance premiums paid by banks and thrifts to replenish its reserve fund after paying out billions of dollars to depositors at IndyMac. The fund, currently at $45 billion, is expected to take a hit from IndyMac of $4 billion to $8 billion.

Federal officials expect turbulence in the banking industry to continue well into next year, and more banks to appear on the FDIC’s internal list of troubled institutions.

Of the 8,500 or so FDIC-insured banks in the country, 117 were considered to be in trouble in the second quarter — the highest level in about five years and up from 90 in the first quarter. The agency doesn’t disclose the banks’ names.

——

Silver State Bank customers with accounts exceeding $100,000 can contact the FDIC at 1-800-523-8177 to set up an appointment to discuss their deposits. 

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High-quality and premium coffees that today command better prices and seduce consumers with their exotic image will eventually become an everyday commodity as demand for them rises, a Brazilian specialty coffee producers said this week.

Joao Guilherme Pires Martins, executive director at Octavio Cafes, which has a vast 6 million-tree coffee plantation in the 1,000 meter altitude Mogiana region, said even very cost-conscious consumers were seeking more flavorful drinks.

“The only way to go is to produce specialty or fine cup coffees. People are looking for them. They don’t want to drink bad coffees with poor taste. Even poor people are looking for good tastes and good prices,” he said.

Martins said prices for specialty coffees were kept high by the fast-growing world demand of about 15 percent per year. But he said that as supply grows, prices eventually would fluctuate in the same way as regular coffees do.

“In my opinion, in 10 or 20 years we won’t have a premium for specialty coffees, just preferences (between types),” he said in an interview at the company’s farm, which is installing its own bean roasting equipment at its newly-built premises.

He said Brazil currently produced around 1.2 million bags of specialty coffee on average per year and estimated that could rise to around 2 million by 2015.

But the slowing economy in the United States, the world’s largest coffee consumer, could slow premium coffee growth fast payday loan no faxing. The specialty sector accounts for 17 percent of U.S. coffee sales.

Ric Reinhart, director of the Specialty Coffee Association, told Reuters at a coffee conference in Nicaragua this week that some U.S. buyers had begun cutting back on more expensive espressos in favor of drip-brewed coffee to save money. 

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The U.S. Federal Reserve has signaled inflation expectations will play a key role in future decisions about interest rates, placing ever greater emphasis on an elusive concept that has proven difficult to measure.

Like many policy-makers around the world, Fed officials have been taken aback by the relentless surge in oil prices. They are hoping such spikes will not make Americans too accustomed to faster price increases.

If consumers and businesses begin to take such inflation for granted, the Fed fears, they might set off a self-reinforcing cycle of demands for better wages and costlier products.

“The upside risks to inflation and inflation expectations have increased,” the policy-setting Federal Open Market Committee said as it wrapped up a two-day meeting on Wednesday, at which it decided to keep its benchmark interest rate steady.

For now, the U.S payday advances. central bank appears to hope tough talk can help tamp down these tendencies, avoiding the need for a near-term increase in borrowing costs.

While expectations are seen as a key ingredient in the future rate of inflation, economists caution a policy that relies heavily on measuring them has its perils.

“Conceptually it’s very powerful, everybody can agree this is a big deal. But there’s a lot of wiggle room for how that gets executed,” said Lakshman Achuthan, managing director at the Economic Cycle Research Institute.

Because gauging consumer and business psychology is difficult, the Fed risks either underplaying or overstating the case for higher rates. In either instance, the repercussions could be costly. 

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Earnings at Morgan Stanley fell by more than half last quarter, hurt by a decline in its investment banking and sales and trading businesses, the company reported Wednesday.

The No. 2 investment bank reported a 57% decline in profits from continuing operations to $1.026 billion, or 95 cents per share, down from $2.363 billion, or $2.24 per share, a year ago.

The results, however, were better than expected on an earnings-per-share basis. Analysts had forecast the company would report a profit of 92 cents a share, according to earnings tracker Thomson Reuters.

Revenue at the firm suffered, falling well short of analysts’ estimates. During the quarter, it dropped 38% to $6.5 billion from $10.52 billion a year ago. Analysts had expected sales of $7.05 billion.

Investors were not comforted by the news. Morgan Stanley (MS, Fortune 500) shares fell nearly 4% in afternoon trade.

"Morgan Stanley’s earnings today suggest that even the most well oiled sports cars face engine troubles from time to time," wrote David Easthope, senior analyst at independent research and consulting firm Celent LLC.

Morgan Stanley’s chairman and CEO John Mack blamed tough market conditions and lower levels of client activity, which ended up hurting results in a number of different divisions.

Among the hardest hit was the company’s asset management division, which posted a pre-tax loss of $227 million, hurt by losses on investments in real estate and private equity that had helped produce a $303 million profit just a year ago.

The company’s fixed income business also got dinged, particularly in sales and trading as well as underwriting. Revenue at its institutional securities business sank to $3.6 billion, less than half of last year’s levels of $7.4 billion.

Investment banking revenues slipped as well, falling 49% to $875 million during the quarter.

The company also booked a $519 million loss related to leveraged loans and noted that the performance of its commodities business was hurt by bad bets on electricity and oil.

Morgan Stanley management also took the earnings announcement as an opportunity to reveal that it suffered a $120 million loss after one of its London-based traders mismarked its books.

Colm Kelleher, the company’s chief financial officer, said during a conference call with analysts the individual was suspended and that the company was conducting a full internal review of the matter.

Offsetting those woes was a $1.43 billion pre-tax gain from asset sales, which included one of its Spanish wealth management businesses.

But if Morgan Stanley management had a message to deliver Wednesday, it was that it was exercising caution, especially when it came to taking risks.

During the quarter, the company did just that, by shrinking its balance sheet and reducing its leverage.

"We will continue to stay close to shore given the current market conditions and focus on our balance sheet and liquidity," Kelleher told analysts during the conference call.

Wednesday’s results, while troubling, are a far cry from where Morgan Stanley was just six months ago no fax payday loan. In the fourth quarter, the company posted a $3.59 billion loss — the first in the company’s 72-year history.

But the horizon has looked dreary as of late for Wall Street. Some underwriting activity has slowed, investment banks are relying less on leverage to boost their returns and have been cutting jobs to deal with the credit crisis.

"There is a great deal of market skepticism building for many of these firms," said Dan Alpert, managing director of the boutique New York City-based investment bank Westwood Capital. "To replace their earnings and earnings growth in prior years is going to be incredibly difficult."

Morgan Stanley is the latest investment bank to report this week that its results have taken a hit due to the credit crunch.

Lehman Brothers (LEH, Fortune 500) confirmed its previously announced $2.8 billion second-quarter loss on Monday while its management sought to ease concerns about the firm’s underlying health.

And while Goldman Sachs (GS, Fortune 500) posted a much better-than-expected $2.1 billion quarterly profit on Tuesday, earnings were still lower than a year ago. Goldman also reported sluggish activity in its investment banking division and suffered a $500 million hedging loss. 

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