It was 9 a.m. on a Thursday morning at Morgan Stanley Dean
Witter & Company’s annual shareholders meeting in Jersey City, and chairman
and chief executive Phil Purcell was standing tall-very tall, indeed.
Six-foot-five and ramrod straight in the darkest of suits, Mr. Purcell towered
above a clutch of admiring shareholders and assorted bankers, lawyers and
Four years ago, he was the Chicago-based chief executive of
retail broker Dean Witter; now he’s the undisputed leader of one of Wall
Street’s most storied houses. Former Morgan Stanley president and chief
operating officer John Mack may have resigned in January, but there was
something about that day, March 22, that made it official.
It was, in fact, Mr. Purcell’s first shareholder meeting
without Mr. Mack-and as timing would have it, there was also a page 1 story in
that day’s Wall Street Journal laying
out, in withering detail, Mr. Purcell’s cold-as-ice boardroom emasculation of his
rival to the throne. “You fucked me,” The
Journal reported Mr. Mack (himself an
in-fighter of legendary repute) as saying to Mr. Purcell when he learned that
his jig was up.
Yes, he pretty much did, and now was the time to relax and
enjoy it. So he smiled broadly, slapped a few backs, shook some hands and
accepted congratulations-the boardroom equivalent, perhaps, of Michael Corleone
holding out his hand for a capo’s kiss at the end of The Godfather , Part I.
But enough was enough: This was reality, not Tinseltown, and
the facts facing Morgan Stanley and the rest of the Wall Street banking crowd
were getting uglier by the day. As if to prove that point, up to the microphone
stepped longtime shareholder goad Harry Korba.
“Chairman Purcell, I live in Yonkers, and I have some valid
and intelligent questions,” rasped the elderly Mr. Korba. “Last year at this
here meeting, the shares of Morgan Stanley closed at 85 and [5/16]ths.
Yesterday the closing price was $54.64. This means that in 11 months and 15
days, our common stock has dropped $31. Now, Chairman Purcell, I know this is
not all your doings, but ….” And down he sat.
Mr. Purcell could have finessed it. Just a few months ago,
anyone in his position would have.
Not anymore. Banks are not only frankly acknowledging the
sliding market, they’re also suggesting that it could be around a good, long
while. All during the week of March 19, the chief financial officers for the
leading investment banks-Goldman Sachs, Bear Stearns, Lehman Brothers and
Morgan Stanley-took to the telephone for conference calls and sounded notes of
blunt, pessimistic caution about the market’s immediate future.
This is a major departure for the banking firms, which
throughout the 90’s had done little to hide their enthusiasm and glee over the
Dow’s and the Nasdaq’s ascension. In those days, there was much talk of new
eras and investor empowerment, and scant mention of the laws of gravity and
But now it’s the reporting period for the major investment
banks, and first-quarter results are down across the board. With the news so
bleak, it is getting harder and harder for these firms to finesse the brutal,
bottom-line realities of today’s market.
For Mr. Purcell, the situation was no different. The
viciousness of the market sell-off was already eating away at Morgan Stanley’s
bull-market riches. The day before, the firm had reported that its
first-quarter profits had declined by 30 percent; the prospects for disgorging
its $6 billion–plus initial public offering of Lucent’s Agere unit were looking
dicier and dicier in an increasingly tech-repulsed market; and its stock price
had been halved in less than a year. Alone and on top, finally, in the
executive suite, Mr. Purcell had to answer to shareholders.
“We are all as keenly aware as Mr. Korba is about the
difference in the stock price,” Mr. Purcell responded coolly. “It is the main
concern of all of our 65,000 employees every day we go to the office.”
The fact that first-quarter results have been weak should
not be a surprise; the I.P.O. market has disappeared, and M.&A. deals are
few and far between. But unlike the mealy-mouthed hedging of their colleagues
strategizing for the public at large, the C.F.O.’s are not beating around the
bush: The market sucks; we are going to take our hits; get used to it.
Goldman Sachs chief financial officer David Viniar blamed
“continued uncertainty in global equity markets” for the firm’s 36 percent drop
in underwriting net revenues.
“It’s clear that the markets are moving into bear-market
territory,” said Lehman Brothers C.F.O. David Goldfarb as he explained his
firm’s 24 percent decline in first-quarter profits.
But the true Richard Perle of investment-bank C.F.O.’s
turned out to be Morgan Stanley’s Robert Scott (who has also recently been appointed
by Mr. Purcell to fill Mr. Mack’s No. 2 slot at the firm). “Despite the rate
cuts, it’s just not clear when the markets will improve,” Mr. Scott said during
Morgan Stanley’s conference call.
The day after the call, at the shareholders meeting, Mr. Scott’s
mood had not improved noticeably. “It doesn’t seem that the market is out of
the woods just yet,” he said. He added: “Trying to understand the direction of
Nasdaq, the S.&P. and the Dow is like trying to predict the weather
It is, of course, a time-honored practice on the Street to
efficiently manage analyst expectations, especially when entering such an
uncertain market period as today’s. And no firms are more mindful of managing
the expectations game than the rule-setters themselves: the investment banks.
The lower you set the bar, the better your chances are of surprising on the
upside and getting a nice little pop in your stock price.
Nevertheless, while all the C.F.O.’s are resolutely downcast
about short-term prospects, for the most part they are giving some hope that
the markets will rebound soon enough, maybe even by the end of the year. With
the exception of Morgan Stanley, that is-a reflection perhaps of the
long-standing gloomy view of the markets held by its chief strategists, Byron
Wien and Barton Biggs.
“It’s not a pretty near-term picture right now,” said
Salomon Smith Barney securities analyst Guy Moszkowski. “But for Morgan
Stanley, Byron Wien has been more dour and bearish than his counterparts at
Merrill Lynch and Lehman Brothers. At a recent analyst meeting, for example,
Merrill executives talked about a rebound in the last quarter. Morgan Stanley
is not voicing that.”
Aside from setting the expectations bar low, there is
another reason for the bank’s dark tone: It could well be preparing the analyst
community for the round of layoffs that are sure to come if things don’t
improve soon. In fact, Morgan Stanley’s Mr. Scott openly admitted that the
firm’s high and expensive head count is an issue. Stating that the firm had
originally expected to grow its staff by 5 percent this year, after 14 percent
last year, he added that that target would be ratcheted down this year. “In
light of the persistence in weak markets, we now expect to keep our head count
flat for the year.”
Similar warnings of head-count and expenditure paring were
voiced by Goldman Sachs and Lehman Brothers.
There is, indeed, a quiet-before-the-storm feeling within
all the major banks right now. Revenues have evaporated sharply, and at a time
when many of the big banks had just spent millions building up pricey
deal-making teams-see Credit Suisse First Boston and Merrill Lynch in
particular-to cope with the tech I.P.O. and M.&A. flow. So far, the
cut-back announcements have been mild-400 or so at Bear Stearns, some normal
attrition here and there at Goldman Sachs and CSFB.
But while Wall Street execs have no compunction about
voicing their pessimism, no one wants to seem panicky à la Merrill Lynch, which
took a very premature meat cleaver to its bond department in the fall of 1998.
Then-president Herb Allison ended up paying for that move with his job a little
less than a year later, when the markets bounced smartly back.
Nevertheless, the tales of woe coming from Wall Street’s
number-crunchers do suggest that those in the trenches see the situation as
being a fair bit worse than they are letting on in public. Which should not be
that big a surprise; these guys are green-eyeshade men, after all, not CNBC
touts, and they are pitching their message to their gimlet-eyed brethren on the
And that message is a simple one: Wall Street executives,
from C.E.O.’s to C.F.O.’s, are not only worried, but are positioning themselves
to take corrective action-namely through layoffs-to please their shareholders.
It’s a volatile time-and even a big winner like Phil Purcell