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Morgan Stanley (MS)
Memo to James Gorman: There's More to MS Than Just the Retail Brokers
The criticism of John Mack over the last 4-5 months has been the lack of trading profits at Morgan Stanley. The market is up 50% since March, rival Goldman has been killing it, but MS is still reporting (albeit) small quarterly losses. Everybody knew Mack was going to have to pay the price for lackluster trading and yesterday, he did, as he gave the corner office to the fastest rising Aussie in the history of Wall Street -- James Gorman. Philip Purcell was forced out of Morgan for similar reasons 4 years ago, weak profits, but he went out acrimoniously while Mack will get a king's farewell. Why? Because without Mack, there is a good chance there wouldn't even be a company for him to hand over to Gorman.
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| Stock Analysis |
The last decade has been a lost one at Morgan Stanley. After Purcell took charge of the firm in the late 90's subsequent to the merger with Dean Witter, he forced out Mack and that started an era of acrimony made worse by the solidification of rival Goldman Sachs' (GS: Charts, News, Offers) position as the best shop on the street. Mack returned to run Morgan in 2005 to much fanfare and for two years, delivered record profits. Then he made a key mistake by underestimating just how bad the housing market was going to get. So his traders were left holding billions of mortgage securities as the financial crisis began. The next few months wiped out years of profits and gains in the stock. But he kept the firm independent thanks to courage and a key investment from Mizuho Financial of Japan. So even though Mack made some big strategic mistakes which cost the firm billions, his legacy at Morgan Stanley will always be secure because the employees there realize that if it wasn't for him, they could very well be out of a job or be a part of some division at JP Morgan (JPM: Charts, News, Offers) or something.
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Now looking ahead to the future, James Gorman has had a relatively short career on Wall Street. He was a consultant for McKinsey but then made his name on the street by managing mother Merrill's massive brokerage force. He boosted the production of brokers by getting them to focus on higher end clients and instituted a cultural shift. Gorman is credited with doing something similar at Morgan (he joined the firm only 3 years ago) and his recent management of the merger between Morgan's brokerage unit and Citigroup's (C: Charts, News, Offers) Smith Barney division has won him a lot of praise and arguably this job as CEO of Morgan Stanley. Can he deliver and usher in an extended period of prosperity? Who knows? But one has to say it would be a significant surprise if he is able to get Morgan anywhere close to Goldman's profit levels. His background is not in investment banking or institutional trading, but in retail wealth management. Morgan made a big bet in that area with the Smith Barney deal and now the board seems to be doubling down on it by appointing Gorman to run the entire firm. The problem is it's a much lower margin business. The revenue flow from it might be more stable but the upside potential is limited.
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Morgan Stanley is betting that the return to prosperity will not be as swift as the recent stock market rally indicates and that Goldman's oversized profits in the first couple of quarters are an aberration. So Morgan is hoping that when the street realizes that things are going to remain weak for a long time to come, the predictability and lowered volatility of Morgan's balance sheet is going to look very appealing. And James Gorman is going to live and die by the outcome of that bet. If Goldman is able to continue churning out those trading profits, Gorman is going to be forced to replicate and whether he can do that or not is highly questionable, given his lack of experience outside the wealth management arena.
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Additional Stuff on Morgan Stanley's Leadership Change:
Dossier on Gorman--Quick history lesson on Morgan's new boss
Becoming Chairman isn't a Good Idea for Mack -- Opines Dick Bove saying Mack Should Leave Morgan Stanley for Good
Views from around the Street on Mack -- Bottom line, he survived
Other Stocks Making News
Campbell Soup -- Despite some headwinds, still managed to beat profit expectations
Good news for GM workers -- The automaker is canceling some recent pay cuts
Google is in for a long fight with the whole book settlement thing
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Click here to view a detailed profile of Morgan Stanley.
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