Yesterday Morgan Stanley took a mortgage-related write-down of $9.4 billion, which led to a sizeable loss for the bank’s fourth quarter. This amount was an increase of $5.7 billion from an estimate it gave the street on November 8th.

By the stock’s reaction (up $2), the market is saying that MS has finally come clean on the credit debacle. All the bad news is out. MS has positioned the announcement that way and it may well be the case. But it still appears to me that these random torpedoes are going to keep coming. If MS can adjust its loss estimate by $5.7 billion in just six weeks, it tells me that the industry really doesn’t know how big the problem is yet. It could be better or worse than everyone expects, but at this point we’re still at the guessing stage.

After assessing the quality of MS’s assets (post write-off), there is a second order question to be asked - what is the on-going earnings power of the bank? Remember that the structured products that created the ‘extraordinary’ losses were the same products that generated ‘recurring’ income in previous reporting periods (i.e. fees, commissions, loan spreads). What would MS or the other banks have earned without juice provided from this part of their business?

What we saw with MS is an example of the ‘recurring versus extraordinary’ game that we have allowed public corporations to play for many years. Every once in a while a company takes an ‘extraordinary’ write-down which sets it up for better ‘recurring’ profit growth in the future. I know it’s difficult to do, but it would be more useful if MS allocated the $9.4 billion write-off against previous year’s income and restated their earnings. That treatment of the loss would give us a better picture of what MS’s earning power really is. As the write-off clearly indicated, the previously reported numbers were overstated.

The other interesting thing that came out of MS’s press release was the comment by CEO John Mack. He said the write-down stemmed from “losses by a small trading team in one part of the firm”. To me it is scary that a small team has the ability to inflict such damage, and vice verse, on such a big institution. We saw the same thing happen earlier this year when some bad trades by a small team of natural gas traders at BMO created $680 million in ‘extraordinary’ write-offs.

Days like yesterday remind us of why the banks trade at price-earnings multiples in the 10-12 range (as discussed in my last Globe column) and why we can make a pile of money investing in the well-managed banks.