Earlier this week, I wrote about how Citigroup's (NYSE:C) new ex-CEO, Chuck Prince, choked on Wall Street's subprime dog food and was unceremoniously dumped on the side of the road. Yesterday, peer Morgan Stanley (NYSE:MS) finally said a few words about just how sick it's gotten from gorging on grade-D financial meat.

It's a familiar story: Allegedly triple-A tranches, created by a process of chopping and mixing lousy loans, turned out to be as crummy as common sense would dictate. As a result, Morgan Stanley says it will write down some $3.7 billion in revenue in its fixed-income biz for the past two months. Things could get worse, the company notes, and it won't be updating investors on any further deterioration until Q4 numbers come out. (Nothing scary about that!)

Fools will want to note a couple of things here. First, fixed-income "revenue" at these big Wall Street banks is based -- to a degree that's not appreciated on Main Street -- on the firms' opinions about what their holdings are worth. Alas, these opinions may be as worthless as some of the junk mortgages backing the dog-food securities. (The more cynical among you may wonder how this is any different from the way Enron booked revenues and profits, based entirely on its guesses about what deals would be worth in the future. Good question.)

But even assuming that the best faith is being exercised by Wall Street's bonus-seeking bean-counters, these value judgments are still based on suspect data such as "observable transactions." That's scary, because, as observers of this credit crunch have seen, there aren't liquid markets for many of these securities. Moreover, many holders of distressed securities have been fighting tooth and nail to avoid trading them in a liquid market, because once real prices are set, everyone will have to mark their holdings down to the new, unpleasant reality.

(This, I believe, is exactly the point of the SIV bailout fund that the Treasury Department has tried to cobble together. Don't like the prices the market will give you on your securities? Create a pretend market to get the prices you want.)

Morgan Stanley's stock bounced slightly on the news this morning, to more than $51 a stub, presumably because the "net" exposure to subprime claimed remains only $6 billion. That'll be cold comfort to those who bought shares at $65 a pop only a few trading days back. And it's probably not a smart move to consider buying shares in any of the train-wreck majors these days -- Merrill Lynch (NYSE:MER), Bear Stearns (NYSE:BSC), UBS (NYSE:UBS), or the others. There are undoubtedly other horrors lurking in these portfolios, and the remaining profitability at many of these outfits depends on trading and wealth management, segments that are highly vulnerable to the very market panics now underway -- market panics that Wall Street created itself, by indulging in such risky behavior.

At the time of publication, Seth Jayson, a top-ten CAPS player, had no shares of any company mentioned here. See his latest CAPS blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.