Phil’s Pyrrhic Win: Phil Purcell Seized the Top at Morgan Stanley – Just in Time for the Recession

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

accountants.

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

business cycles.

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

report.”

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

Street.

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

knows it.