Morgan Stanley (MS) chief John Mack has put down an uprising of restive shareholders. Mack and other members of the brokerage firm’s board were re-elected at Tuesday’s annual meeting, with each director getting at least 90% of votes cast. Shareholders also rejected a proposal that would have given them an advisory vote on executive pay.

“We appreciate the strong support that shareholders have shown for the board today through the re-election of our directors by substantial margins,” Mack said in a midmorning press release. “Our entire board is deeply engaged and intensely focused on building value for our shareholders through this unprecedented market environment.”

Shareholders including the California pension funds Calpers and Calstrs and the union pension adviser CtW Investment had said they would withhold votes from Mack and other directors because of Morgan Stanley’s poor performance. Mack said in Tuesday’s press release that Morgan Stanley “achieved the highest net income and ROE of any firm that has reported earnings to date” for the first quarter, but investors are still smarting from the firm’s big subprime-related writedowns back in the fourth quarter, which forced the firm to raise $5 billion in new capital from overseas investors.

The fact that Mack is back under the gun after just three years at the helm of Morgan Stanley has Dan Colarusso at Portfolio wondering what the big deal is about the guy anyway. “Morgan shares are now about where they were when Mack returned in 2005 - after having about one-third sheared from their value over the past four months,” he wrote last month. “Mack the Knife, indeed.”

Morgan Stanley (MS) made it a trifecta of better-than-expected earnings reports on Wall Street this week. The New York-based brokerage firm made $1.55 billion, or $1.45 a share, for the fiscal first quarter ended Feb. 29, down from the year-ago $2.31 billion, or $2.17 a share. Revenue fell 17% from a year ago to $8.3 billion. The results easily beat analysts’ expected profit of $1.03 a share on revenue of $7.2 billion. “While many of our businesses are facing challenging market conditions that we expect to continue in the months ahead,” CEO John Mack said, “we are satisfied with how Morgan Stanley navigated the ongoing market turbulence.”

The latest quarter reflected several strong points, including a 51% gain in equity sales and trading revenue. Morgan Stanley posted its second-best quarterly performance in fixed income sales and trading revenue and its third-best ever numbers in institutional securities. The company, whose report comes on the heels of solid performances Tuesday at rivals Goldman Sachs (GS) and Lehman Brothers (LEH), said it took $1.1 billion in mark-to-market writedowns of loans and loan commitments, and $1.2 billion of mortgage trading writedowns.

One blemish on Morgan Stanley’s latest report came in the asset management business, which swung to a $161 million pretax loss as real estate markets continued to weaken. Revenue in the unit dropped 60% from a year ago, despite $6.6 billion in net customer inflows and an 11% rise in assets under management. Shares rose 3% in early trading, though.

Another obscure corner of the debt market is causing pain for taxpayers. States and cities selling municipal bonds are finding they have to pay more to issue so-called variable-rate demand notes, The Wall Street Journal reports. As with the collapse earlier this month of the now infamous auction-rate securities market, the problem is that Wall Street dealers such as Bear Stearns (BSC) and Morgan Stanley (MS) have stopped buying the debt, which allows municipalities to borrow for the long term at lower short-term rates. The dealer pullback has caused demand to dry up and interest rates to spike. The rate California paid on a recent $300 million issue quadrupled to more than 8%, the Journal reports.

Meanwhile, in a novel twist, the failure of the notes to sell at auction could leave them piling up on the balance sheets of so-called backstop banks such as Bank of America (BAC) and Citi (C), which are already stuck with billions of dollars of loans and other assets they can’t sell. That’s not even the worst news in the municipal bond market, though: Bloomberg reports that the California city of Vallejo is near a bankruptcy filing brought on by the collapse of the housing market, which has resulted in lower tax revenue, and rising pension costs. “Bankruptcy is a last resort,” councilwoman Joanne Schivley said, Bloomberg reports. “But guess what folks, that’s where we are now at.”

Morgan Stanley (MS) is cutting 1,000 jobs as it scales back its residential mortgage business. The move comes as no surprise, given the sharp pullback in the housing market over the past year. Morgan Stanley rivals such as Bear Stearns (BSC) made deep cuts in their own mortgage businesses last year as the mortgage market ground to a halt.

The mortgage crisis has already had a lasting impact on Morgan Stanley: In December, the firm took a $9.4 billion writedown of mortgage-related securities and bid adieu to Zoe Cruz, the executive who had been seen as the heir apparent to CEO John Mack. Morgan Stanley also raised $5 billion from Chinese investors to rebuild its capital base. Now, acknowledging the “continued dislocation in the mortgage markets,” the firm says it has “restructured our residential mortgage business to ensure we are appropriately positioned for the environment going forward.” That is, a much less forgiving environment.

By James Ledbetter

You may not be old enough to remember this, but once upon a time, the New York Times business section was really, really bad. A distant poor cousin to the Wall Street Journal, the “D section” as it was then - I’m talking through the late ’80s - was late and colorless on the stories it didn’t miss altogether. It is infinitely better today, competing story-for-story with the Journal, and featuring several must-read writers, including Floyd Norris (who’s admittedly been around since the darker days), Joe Nocera, and even - it surprises me to say it - Gretchen Morgenson.

Still, there are mornings when the paper publishes something that feels like a blast from the poorly thought-out past. The lead business feature today, headlined “Not a Jolly Season For 2 Top Bankers,” is an example. The premise is sound enough: James E. Cayne of Bear Stearns (BSC) and John Mack of Morgan Stanley (MS) have had terrible years, and there ought to be pressure from shareholders and others for them to go, as was the case for Citi’s (C) Charles Prince and Merrill’s (MER) Stanley O’Neal.

So far, OK. But the article begins to drift in the fourth paragraph:

As losses from the spreading mortgage crisis mount on Wall Street, the question of whether chief executives should stay or go has become a sensitive issue for boards and the executives themselves.

Leave aside the obvious point that for most chief executives, it’s always been a sensitive issue whether they stay or whether they go, and it always will be. The article then goes on to contradict itself. It says: “So far, there has been no public outcry from investors or internal revolts at Bear Stearns and Morgan over the fact that Mr. Cayne and Mr. Mack are staying on.” But just a few paragraphs later, a securities analyst from Punk Ziegel (love that name!) is quoted saying: “Investors are telling me that [Cayne] should go. He has a mind-blowing loss that is his fault, and he should take responsibility for it.” That kind of sounds like an outcry (though I suppose one could debate whether it is public).

But the biggest sin this story commits is to completely miss what IS different about this era. And that is: one reason why boards or investors might be reluctant to dump underperforming executives is because they don’t want to pay for the privilege. As my esteemed colleague Allan Sloan has pointed out, these top Wall Street executives get paid tens of millions of dollars a year, even when their firms post staggering losses. It would take even more millions to make them leave, and then you’ve got little guarantee that the next person will do any better. As long as that kind of money has to be shelled out, you may as well get some work out of them. I don’t know why the Times omits this rather obvious and overwhelming fact; perhaps it is a “sensitive issue.”

As investors brace for Bear Stearns (BSC) to deliver the next round of bad news from Wall Street, FTAlphaville is turning a skeptical eye on Wednesday’s finger pointing at Morgan Stanley (MS). The big brokerage firm posted a $3.6 billion fourth-quarter loss, mostly as a result of $9.4 billion in writedowns tied to subprime mortgage-related securities.

CEO John Mack and finance chief Colm Kelleher made a point of blaming ”trading by a single desk in our mortgage business,” but FTAlphaville takes issue with the notion that “trading” was the problem at all. It notes that much of Morgan Stanley’s loss was tied to a big holding of so-called super senior tranches of CDOs — which, until recently, was seen as among the safest nongovernment paper around. “For a start,” Sam Jones writes, “why make such a huge, singular bet on such a dull, low-yielding product?”

Why indeed? Because, Jones continues, slicing and dicing products like collateralized debt obligations, and applying leverage to them to make them more profitable, has become standard operating procedure in the banking industry. Doing so while times were good padded the banks’ bottom lines, and now, with markets cranky and risk-averse, the banks’ lax attitude toward risk is coming back to haunt them.

Either way, what happened to Morgan Stanley is no aberration, Jones suggests. “Morgan Stanley’s super senior exposure goes way beyond being the responsibility of ‘one desk,’” he concludes. “It’s a pretty accurate reflection of banks’ way of conducting business in general.”

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.

Top execs at Bear Stearns (BSC) are taking their lumps after a lousy year at the big brokerage firm. The Wall Street Journal reports that CEO James Cayne and other high-ranking officials will forgo their bonuses after the firm posted huge losses tied to the collapse of the market for subprime securities. That’s a refreshing change at Bear, which generally hasn’t distinguished itself during this year’s mortgage mess. Ralph Cioffi, the fund manager who led two internal hedge funds that collapsed this summer under the weight of bad bets on mortgage bonds, recently left the firm under a cloud. Prosecutors are probing his decision to yank $2 million out of one of the troubled funds just months before it imploded, the Journal reports.

It’s not clear how deeply bonuses will be slashed for others at Bear, but the outlook can’t be pretty given that the firm has made most of its money in recent years in the fixed-income markets that have swooned so drastically in 2007. Earlier this week, Merrill Lynch moved to slash bonuses for some bond desk employees by as much as 80 percent – though some readers contend a 100 percent decline might be more appropriate. Just how bad Wall Street’s pain will be should become clearer Wednesday, when Morgan Stanley (MS) is due to post fourth-quarter numbers, and tomorrow, when Bear unveils its own ugly quarter.

The Federal Reserve is back in the hot seat Tuesday afternoon as investors await its latest interest-rate move. Economists expect the Fed to trim its fed funds overnight lending target by 25 basis points, to 4.25%, in a bid to ease problems in the credit markets. Some people are talking about a steeper cut in the name of keeping the economy rolling, while others warn that rate cuts risk stirring up inflation.

But this time around, a rate cut seems a near certainty, given the rising chorus of recession calls. On Monday, Morgan Stanley predicted U.S. gross domestic product will be flat for the year ending September 2008 as domestic demand over the next three quarters contracts 1 percent. The firm stresses that it believes strong global growth will keep the recession brief, though it notes that there are risks of a deeper decline. “Dramatically slower growth in domestic demand leaves it vulnerable to shocks,” economists Richard Berner and David Greenlaw wrote. “Insufficient Fed action could again threaten a deeper economic slowdown.” Don’t expect the Fed to stand pat with talk like that.