UPDATE 4-Morgan Stanley posts third straight quarterly loss

* Loss $1.10/share vs profit $1.02

* Takes $850 mln charge related to repaying bailout

* Shares close down 2 cts (Recasts, adds comment from CFO and analysts, background, additional details on earnings)

By Steve Eder

NEW YORK, July 22 (Reuters) - Morgan Stanley (MS.N) on Wednesday reported a third straight quarterly loss, falling further behind chief rival Goldman Sachs (GS.N) as fixed income and asset management results disappointed.

While Goldman last week posted a 33 percent rise in quarterly earnings with strong gains in trading and profit, Morgan Stanley was saddled with more red ink from the repayment of government bailouts and the accounting ramifications of improvements in its debt prices

Its loss, which also resulted from operational weakness in businesses where Goldman romped, was even wider than Wall Street had expected.

"They are becoming much less comparable than they used to be," said Michael Vogelzang, president of investment firm Boston Advisors, which owns stock in both banks. "And at the end of the day, Goldman continues to bang it out."

The results prompted Morgan Stanley Chief Financial Officer Colm Kelleher to label 2009 a "year of transition."

"We are not into the quick show of how good we are," Kelleher said in an interview with Reuters Television. "What we want to show is steady improvement, which we are doing, and fleshing out a model which we believe is robust, within which institutional securities is key."

Morgan Stanley reported a loss of $1.26 billion, or $1.10 per share, for the second quarter, compared with a profit of $1.1 billion, or $1.02 a share, a year earlier. Net revenue fell 11 percent to $5.4 billion.

Stripping out one-time items, Morgan Stanley posted a loss of $1.37 a share, much worse than analysts' average forecast of a loss of 53 cents, according to Reuters Estimates.

Morgan Stanley struggled in key areas during the quarter, including commercial real estate, where it reported net losses of $700 million amid declines in the market.

"We have been clear that real estate was our biggest concern as an asset class," said Kelleher, adding that "over time" he is hopeful real estate losses will "decelerate."

Morgan Stanley shares closed 2 cents lower at $27.54 on Wednesday on the New York Stock Exchange, after earlier trading down more than 6 percent as some investors gave the results a more favorable second look.

"There were so many one time events in the quarter," said veteran analyst Richard Bove, with Rochdale Securities. "They obscured the fact that their core businesses did not do badly at all. I would think, going forward ... their earnings would be a bit better than they showed."

NO CONTEST

During the quarter, Morgan Stanley repaid $10 billion from the government's Troubled Asset Relief Program, incurring a one-time charge of $850 million.

Morgan Stanley's CFO said the firm was still negotiating with Treasury on the buyback of TARP warrants. Goldman Sachs, which also repaid $10 billion in loans, announced on Wednesday that it purchased its warrants for $1.1 billion, a move underscoring its dominance among banks.

The improvement in Morgan Stanley's debt prices reduced net revenue by $2.3 billion because of an accounting practice.

But there were still shortcomings in key areas of Morgan Stanley's business.

Fixed income trading rose 44 percent from a year earlier to $973 million, including a $1.3 billion loss related to debt-related credit spreads, but fell short of expectations. Goldman, by contrast, reported $6.8 billion in fixed income, currency and commodities trading revenue, almost triple its year-earlier total.

Morgan Stanley said concerns about fixed income performance were being addressed. The firm on Monday announced the hiring of Jack DiMaio, a former Credit Suisse Group AG (CSGN.VX) (CS.N) fixed-income head for North America. DiMaio was named global head of interest rate, credit and currency trading at Morgan Stanley.

The bank set aside $3.9 billion for compensation expenses in the second quarter, up from $3.1 billion a year earlier. Goldman was widely criticized for setting aside $6.65 billion in the quarter, a total that could foreshadow average employee payouts for 2009 of nearly $1 million.

Morgan Stanley CEO John Mack said months ago he planned to ratchet down risk-taking after the downfall of some of its competitors last year. Measurements showed risk was flat during the second-quarter.

"We had a warning from Mack that he was going to rein in the risk-taking, and he did," said Michael Holland, a money manager with Holland & Associates.

Morgan Stanley's "value at risk," a measure of the maximum possible losses it faced on 95 percent of its trading days, on average was $113 million, compared with $100 million a year ago and $115 million in the first quarter of 2009.

Goldman Sachs, known for its risk-taking prowess, reported "value at risk" of $245 million in the second quarter, a 2 percent increase from the first quarter.

The risk-taking was a key factor in Goldman's blowout earnings that put left competitors like Morgan Stanley trailing.

"Comparing anyone to Goldman right now is a tough comparison," Holland said. (Reporting by Steve Eder, additional reporting by Sweta Singh; Editing by John Wallace, Phil Berlowitz)