Morgan Stanley CEO John Mack opened the Morgan Stanley earnings call today by saying the firm’s quarterly results were “embarrassing.” Quite. But, he quickly pointed out that—excluding mortgage-related businesses—the firm performed well year-over-year. Indeed, Mack says the poor fiscal 2007 results were the result of mistakes by one fixed-income desk. But at least one analyst thinks the firm’s errors could cost Morgan Stanley dearly down the road in lost employees and clients.

Of course, the retail brokerage continued to shine, with client assets growing in the low double digits from fiscal 2006. Mack called Morgan financial advisors the best in the industry.

The firm reported a loss of $3.58 billion, or $3.61 per share, many times larger than analyst consensus estimates. Sinking the firm’s fourth-quarter results was a $9.4 billion write-down, $7.8 billion of which was due to sub-prime loans and $1.2 billion due to other mortgage related loans. As a result, the firm has accepted a $5 billion capital infusion from China Investment Corp, making it a 10 percent stakeholder in the company. Mack emphasized that China Investment Corp will be a “passive investor,” but that its involvement will help Morgan Stanley expand its operations in China in the future.

Full-year net revenue for the firm was $28 billion, second only to last year’s $29 billion. Alas, the firm’s full-year net income of $3.2 billion was less than half of last year’s $7.5 billion. The damage was done primarily in the fourth quarter, for which the company recorded a negative $450 million in net revenues, a stark contrast to the $7.8 billion in revenues in the same period last year. Fourth-quarter income was a negative $3.6 billion, compared to $2.2 billion in the same time last year. Return on equity for the year dropped to an embarrassing 8.9 percent, down from last year’s 23.5 percent. Wachovia Capital Markets analyst Doug Sipkin thinks the damage done this quarter will have lasting effects: “This quarter will put MS in a precarious position as it relates to keeping clients and keeping employees, in our opinion … further strategic initiatives under the current leadership will likely be scrutinized … considering the poorly timed push into the mortgage market at the end of 2006.”

Who’s accountable for the dismal results? Well, John Mack is, of course, and he said as much in the firm’s press release. “I believe in pay for performance, so I’ve told our compensation committee that I will not accept a bonus for 2007,” Mack stated. But while he’s holding himself accountable, he did spare himself some of the blame: “The loss was the result of an error in judgment that occurred at one desk in our fixed-income department.” Ouch. That desk has been dealt with, he said.

After getting the ugly news out of the way, Mack emphasized that the firm’s core businesses had another fabulous year overall, and that the firm continues to grow and improve. Not least of which is the Global Wealth Management Group, which under the leadership of James Gorman, has orchestrated an impressive turnaround. Mack pointed out that Gorman, as co-president of the unit, is part of his new senior management team, which, among other things, will be focusing on risk management. He then mentioned Ellyn McColgan—though he mispronounced her name, referring to her as Ellyn “Clogan”—recently hired from Fidelity, who will be picking up Gorman’s old job and leading the firm’s increasingly successful financial advisors.

Global Wealth Management’s net revenues were up 20 percent to $6.6 billon year-over-year and pre-tax income was up 126 percent to $1.2 billion. The full-year pre-tax profit margin in the unit was 17 percent, the highest annual margin since 2000. According to the firm, underwriting, growth in fee-based products and higher net interest revenue from growth in the bank deposit-sweep program were the primary drivers of revenue growth.

Total client assets in Global Wealth Management are now $758 billion, up 12 percent from the end of last year. Client assets in fee-based accounts rose 3 percent from last year to $201 billion and now represent 27 percent of total assets. The number of financial advisors rose 6 percent to 8,429. The firm’s continued efforts to weed out lower producers and attract better ones have yielded results as well: Annualized production and assets per advisor are $853,000 and $90 million, respectively. According to Mack, the financial advisors are “the most productive in the industry,” but that may be a premature calculation since Merrill Lynch and UBS don’t report fourth-quarter results until after the New Year.