Morgan Stanley and the kitchen sink

Morgan Stanley (MS) is trying to clean up its act. The big brokerage firm posted a massive fourth-quarter loss as mortgage-related writedowns continue to mount. The company lost $5.8 billion, or $3.61 a share, for the quarter ended Nov. 30, reversing the year-ago profit of $2.3 billion, or $1.44 a share. The latest quarter included $9.4 billion of subprime-related writedowns — up sharply from the $3.7 billion mortgage hit Morgan Stanley previously predicted for this quarter. The firm’s decision to throw out all but the kitchen sink in its fourth-quarter numbers will no doubt have some Wall Streeters predicting that the worst is over.

Adding to that line of thinking, Morgan Stanley lined up a $5 billion investment from China Investment Corp., joining with Citi (C) and countless others in tapping the rich vein of sovereign wealth funds. China will end up with a stake as big as 9.9 percent in Morgan Stanley, though the firm stresses the fund won’t end up with any special rights such as board representation.

And mimicking Bear Stearns (BSC), Morgan said CEO John Mack won’t take a bonus, which seems appropriate given that it was Mack’s bright idea to boost Morgan Stanley’s risk profile in the first place. That’s probably cold comfort to Zoe Cruz, the onetime heir apparent who was ousted earlier this month as Morgan’s mortgage problems surfaced. “Ultimately, accountability for our results rests with me, and I believe in pay for performance,” Mack said in Morgan Stanley’s press release Wednesday, “so I’ve told our compensation committee that I will not accept a bonus for 2007.” It’s a start.