Morgan Stanley's Back in the Game

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A few months back, Morgan Stanley (NYSE: MS) made it clear that it wanted back in the game, beefing up its trading arm in order to match the greatness of Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM).

So far, so good.

Morgan's net income for the third quarter came in at $757 million, or $0.38 per share. That was actually down substantially from $6.97 per share last year, but last year's results were dramatically skewed by accounting gains after debt spreads blew out during a brief death scare. On a normalized basis, the current results were solid by any measure.

But as expected, almost all the sequential gains came from an uptick in trading revenue:

Segment	Q3 2009 Revenue	Q2 2009 Revenue
Investment Banking	$1.2 billion	$1.3 billion
Trading	$3.2 billion	$2 billion
Investments	$99 million	($115 million)
Commissions	$1.2 billion	$975 million
Asset Management	$2 billion	$1.3 billion

The other big gain was asset management, which is growing thanks to the 51% acquisition of Smith Barney from Citigroup (NYSE: C). Last month, Citigroup said it would eventually sell its remaining 49% stake to Morgan Stanley.

For shareholders, I suppose it's good news that Morgan Stanley's trading unit is firing on all cylinders. But the idea of a Wall Street arms race to profitability should please no one. During the quarter, Morgan Stanley's tangible leverage ratio (which includes common and preferred equity) increased from 13.7 to 15.7. That's down dramatically from the 30-plus ratios we saw in the boom years, but the notion that leverage is already creeping back up, just so that banks can match the performance of their too-big-to fail neighbors, is depressing.

True, there are phenomenal opportunities in areas such as fixed-income trading, and banks should exploit them. But the mega-investment-banking model is still nearly identical to last year's, if not more dangerous. As my colleague Matt Koppenheffer has noted, nothing has changed in banking.

What do you think? Is the investment banking model due for a fierce regulatory overhaul? Let me know in the comment section below.