The Wall Street profit drought has claimed another victim, with Morgan Stanley (NYSE:MS) placing a company-wide hiring freeze on its workforce and people inside the firm bracing for layoffs later in the year, FOX Business Network has learned.

Morgan Stanley put the brakes on hiring about a month ago, when it became clear that profits for the third quarter were likely to be substantially lower than previously estimated. As reported by FOX Business, a profit drought has forced every major bank and financial firm to reassess hiring, and bonuses levels, for 2010, with Bank of America (NYSE:BAC) emerging as the first firm to institute layoffs. BofA is cutting staff in its capital markets group by as much as 5% amid a sharp decline in trading revenue at the big bank.

Morgan Stanley isn't planning layoffs, at least not yet, according to analysts who have met with the firm. But according to people close to the company, CEO James Gorman is closely monitoring the firm's performance during the fourth quarter of this year. If it mirrors what is expected to be a lousy third quarter, bonuses will be dramatically cut from last year's levels and so will headcount, according to people close to the firm.

A Morgan Stanley spokesman confirmed to FOX Business that a hiring freeze is in place.

Recently analysts have been cutting earnings estimates for Morgan and other Wall Street firms as sharply lower trading volumes and anemic business activity in areas such as investment banking for all the banks begins to squeeze profits.
Deutsche Bank slashed Morgan's third-quarter estimates from an already meager 50 cents a share to 15 cents a share.

The issue for Morgan Stanley and for the rest of Wall Street is whether the profit squeeze will continue in the fourth quarter.

"A lot depends on the fourth quarter," said one senior Wall Street. "If it looks anything like the third quarter, everyone will be cutting."

Morgan Stanley may be in a particular difficult spot, especially compared with its long-time rival Goldman Sachs (NYSE:GS). Although lower trading volumes are expected to squeeze Goldman's bottom line -- analysts think the firm could make $7 billion this year, compared with more than $12 billion last year -- Morgan's business model may produce even smaller profit margins.

Under Gorman, who took over earlier in the year from John Mack, who remains as chairman, the firm has de-emphasized trading and focused on being a firm that advises clients through its brokerage sales force (the largest on Wall Street given its acquisition of the Smith Barney brokerage unit) and in its investment bank. While these businesses are less risky (Morgan had an $8 billion trading loss in 2007 and needed a government bailout to survive the 2008 financial
crisis) and produce more stable earnings, they also result in smaller profits.

But Gorman is telling analysts he has no plans to shy away from the strategy.

"He's saying that he has no plans to turn away from the advice-focused business model," one analyst told FOX Business.