Morgan Stanley CEO James Gorman

In 1987, I began my rookie assignment on the stock sales and trading desk for Morgan Stanley. A few weeks later the stock market crashed, and I learned my first important lesson about the pecking order on the Street. As a newcomer, my senses were on high alert. Across the floor, a trader named Chuck stood with a phone pressed hard against his ear as he barked out ear-piercing commands. Closer by, I found an island of serenity as the carnival of capital plunged into chaos. His name was Lou, and he was a smooth-talking senior salesman with a magnificent collection of suspenders.

Lou held a special role in the ecosystem of our department. He could get Peter Lynch, the legendary manager of Fidelity’s enormous Magellan fund, on the telephone. Morgan’s top brass would always stop by Lou’s desk on a tour around the trading floor. And Lou received the equivalent of a three-bedroom Upper East Side apartment every year by virtue of his guaranteed payout, earned on the commissions generated by his customers, an elite list of the firm’s largest clients.

Chuck, on the other hand, was belligerent and a bully. While he was exposed on a trade, he would holler at his sales team, inches from their faces, until his position was clean and his profit had been booked. Chuck and Lou were a study in contrasts, but they were the yin and yang that made our department work. Lou was envied and Chuck was hated, but we needed them both. They embodied a new and more impetuous breed, and they provided order and purpose for the toil of junior staffers like me. We all wanted to become them.

When the market crashed, everyone knew that Lou and Chuck were going to be okay. Others were less fortunate. Several weeks after the crash, a tall, expressionless guy named Bruce from the human resources department shuffled onto the floor like the Grim Reaper and escorted two young sales staffers into a back conference room to dismiss them. Junior staffers were expendable. I remember that Lou didn’t look up to say goodbye to our terminated colleagues. He was too busy cooing into his telephone for money.

This quarter-century-old flashback hit me as I was reading the news that a notorious hedge fund manager named Dan Loeb has taken a position in the shares of Morgan Stanley. Attracting an activist shareholder is a nuisance, the Wall Street equivalent of a political tracker following your every move, camera in hand.

Morgan Stanley’s shares, which briefly traded below $10 a share after being stung by a nearly $9 billion mortgage trading loss in 2008, popped 8 percent to over $22 on Friday on an earnings report that delivered the first solid evidence of a profit turnaround. But the stock still trades at nearly 20 percent below book value, a crude measure of the net liquidation value of the firm’s assets. Stated another way, the stock market’s present assessment is that this venerable brand—a company that innovated many of the products and strategies that define what it means to be a modern securities firm—has no sustaining franchise value. Morgan Stanley is priced to be worth more dead than alive.

What is most intriguing about Mr. Loeb’s investment foray is that he clearly intends to push for value creation by homing in on a very touchy subject—Wall Street compensation. Mr. Loeb’s premise is simple: the firm’s employees are overpaid.

There was a time when it would have been absurd—heretical, even—for an outside shareholder to challenge the wisdom of the Masters of the Universe who call the shots at Wall Street’s big banks. But that was then. Morgan Stanley’s current chairman and CEO, James Gorman, is neither tone-deaf nor ignorant of history. He must recall how Phil Purcell, the first CEO of the merged Morgan Stanley-Dean Witter, ended up with his head on the chopping block when his autocratic reign ignited an employee and shareholder revolt.

Mr. Gorman, a cerebral Australian who previously managed the retail brokerage business at Merrill Lynch after a stint at the consulting firm McKinsey, has little loyalty to the testosterone-fueled twins named big risk and big pay. He has spoken frequently of the need to reduce compensation costs, and he personally reached out to Mr. Loeb to welcome him aboard as a shareholder. Morgan Stanley also recently announced a double dose of retrenchment: major job cuts that would target higher-earning staffers and a bonus-deferral plan that would extend payouts to high earners over three years. Translated, this means that high-octane types like Chuck are going to get fired while other big producers like Lou will have to stick around and be productive for a number of years before being able to spring for the new apartment. The fashion of the Street is changing again, and Mr. Gorman is emerging as the leading designer.

It appears that Messrs. Loeb and Gorman have both concluded that the way forward is a strategy of addition by subtraction. Shrink the amount of capital and personnel costs tied up supporting trading books and businesses that earn a poor or volatile return and use that money to invest in higher return or more stable businesses. The firm’s recent deal to acquire control of the Morgan Stanley Smith Barney retail brokerage joint venture is one example of this strategy at work. Or, lacking better alternatives, the firm can use the money to buy back stock in the marketplace at a discount from book value, an action that should drive up the share price by increasing the net assets supporting a smaller number of shares that remain outstanding.

The biggest source of flaccid bloat in the current Morgan portfolio was once its most profitable business. But now a fix is needed for FICC, which trades the fixed-income, currency and commodity products that give the division its acronym. This area of the firm is still clogged up with illiquid, multiyear contracts on derivatives, swaps and other complex products that everyone seems to understand only so long as they are appreciating in value. This is also the area that hatched the mortgage trade that nearly sunk the firm back in 2008. But Gorman’s weed-whacker is clearly hard at work: the risk-weighted assets in the business have declined by over $100 billion in a little over a year, and the risk pool will fall much further in the years ahead. On a trading basis, the firm has lowered its value-at-risk from $108 million to $78 million over a comparable period.

The skeptics inside and outside the firm are grumbling about unintended consequences. “You will lose your best people and harm recruiting if you cut comp,” they say. “A diminished market presence in one business affects the trading flows in another,” is another gripe. Then there’s, “Is Morgan Stanley to become a firm without a soul, a place with a culture more akin to an Amazon fulfillment center?”  

Back when I became a partner at Morgan Stanley, there was a process by which new entrants to the firm’s most coveted position were indoctrinated into company culture and traditions. Speeches were usually delivered by retired partners, who were housed offsite in a suite of offices we called Jurassic Park. In Jurassic Park the phones never rang, so these former titans were only too eager to regale the young guns with tales of honor and brilliance that always concluded with the admonition to conduct “first-class business in a first-class way.”

I’m not sure if the culture-carrying exercise was meant to inspire us or to warn us. These events typically dragged on long enough for the newly anointed young guns to begin getting antsy. Wrap it up, we were all thinking, there might be a big deal going down back on the desk. While the business might once have allowed for relationship-building over long lunches, we were a more ravenous breed, scarfing down quick meals while talking into the telephone. To be found eating in the partners’ dining room was a certain career hex. Much better to work on earning a nickname—like The Hammer, a volatile partner who once slammed his telephone so hard onto his desk that he ended up wearing a plaster cast. The markets were rollicking, and Chuck and Lou were rolling. They were the future, and to mimic their behavior was to plan for a long and lucrative career.

The Street is a marketplace, constantly evolving. So perhaps it is no surprise that when I was coming of age in the business, things sped up and lessons were forgotten. It is hard to recall there was a time when a corporate CEO would have to call his investment banker to get a price quote on his own stock, a simple information request that revealed the banker’s privileged information advantage. Today money zips around in a digital world, prices are transparent and profits are measured in real time. This is a good time to rely more on process rather than people in constructing a firm that is built to last.

Mr. Gorman is swinging the pendulum back toward a more sober, less aspirational and more reliable business posture. He appears entirely comfortable that something and someone might be lost in the process. But the firm will survive, its profits will improve and the company’s stock price will trade back up to book value, and beyond.

Morgan Stanley is leading the Wall Street banks into a new era. These still-too-big-to-fail financial giants will become the utility stocks for a new generation, tightly regulated, prized for stability and rewarded for an ability to wring small and predictable gains from a broad portfolio of financial products. Thrill-seeking investors will shun these stocks, and shareholders will stand at the annual meeting to ask when the dividend will be raised. And then, somewhere down the line when things are calm, the pendulum will swing again and a new CEO will decide that the business really needs a little more Chuck in its blood.

Scott Sipprelle is a former managing director of Morgan Stanley. He is also a former hedge fund manager who closed his Copper Arch Capital in 2007, months before the global financial markets collapsed. He is currently a venture capitalist.

It seems the Times has also seen a "bootleg" copy of Greg Smith’s Why I Left Goldman Sachs, and its take is in line with what we've read of the book so far: "Long on Mr. Smith’s reminiscences of the pleasures of the job—handmade suits, sashimi at 30,000 feet, strawberries at Wimbledon—the former Goldman salesman’s book does not break much new ground on illegal or questionable financial practices at the firm."

Morgan Stanley chief executive officer and noted compensation realist James Gorman is likely to miss performance targets that would have netted him nearly $6 million, according to Bloomberg.

Argentina has found a jurisdiction where it can hide from Paul Singer’s Elliott Management, the hedge fund that seized an Argentinean naval vessel earlier this month, according to The New York Post. The Swiss government refused Elliott's request to embargo Argentina's deposits in the Bank for International Settlements, arguing it had no authority over the so-called central bank for central banks.

Anthony Chiasson, the Level Global hedge fund manager facing insider trading charges, is seeking to draw his better-known partner David Ganek into court. As Dealbook explains, Mr. Chiasson's lawyers say Mr. Ganek's trading records are similar to those of his client; Mr. Ganek wasn't accused of wrongdoing, so the fact that the two partners made similar trades may raise doubts on the charges against Mr. Chiasson.

With SEC Chairman Mary Schapiro expected to step down in the months to come, Bloomberg looks back at the tenure of a woman who revived the agency yet failed to meet several stated objectives.

It was a good day for Italian and Spanish bond markets.

Business Insider has a great email exchange between Democrat Whitney Tilson and Republicans on his email list.

A lobbying group backed by Elliott Management's Paul Singer enlisted the American Agriculture Movement, the American Association of University Professors and the Cattle Producers of Washington, to lend heft to investors' efforts to recover defaulted Argentinean debt through political channels. One problem? The trade groups aren't really sure how their good names got associated with anything having to do with Argentina, as The Wall Street Journal reports.

Another strange one: A former employee of William Koch—billionaire brother to Charles and David—says his boss kidnapped him after he raised concerns over a plan to evade $200 million in taxes.

Caxton Associates is trimming management fees to 2.6 percent form 3. percent, and performance fees to 27.5 percent from 30 percent, according to The Journal. Macro funds such as Caxton often charge higher fees than the traditional two and twenty; Caxton follows macro funds Tudor Investment Corp and Graham Capital Management in adjusting fee structures.

High-frequency trading firms are said to be dialing back in the face of lower profits.

James Gorman, Wall Street revolutionary?

Activist investors Warren Lichtenstein and Tim Brog are squaring off over board seats at supply-chain company ModusLink, according to The New York Post.

There's plenty for world finance chiefs to fight over in a series of upcoming meetings. There's Greece, of course, plus Spain, Italy and assorted other eurozone economies. Also: a territorial dispute between China and Japan, not to mention U.S. lawmakers' refusal to deal with the coming fiscal cliff.

Thousands of anti-austerity protesters marched through Madrid, banging pots and pans, to protest austerity measures.

Send in the troops! The Swiss Army is preparing to mobilize in event that the European debt crisis turns violent.

The London Whale—still mysterious/fascinating as ever.

Straight talkin' James Gorman told The Financial Times that pay cuts would continue: “What the Street has historically done is when revenues went up, they kept the comp-to-revenue ratio flat. They rank comp by ratio. When revenues went down, they increased the comp-to-revenue ratio because they said, ‘We might lose all our people. We have to increase it.’” The Morgan Stnaley CEO added: “That’s a classic Wall Street case of ‘Heads I win; tails you lose.’ The current Wall Street management is a little tougher-minded about that and shareholders are certainly tougher-minded.”

Royal Bank of Scotland suspended a trader for trying to rig the Singapore dollar interest rate swap, according to Bloomberg. The trader, Chong Wen Kuang, was named in the lawsuit of Tan Chi Min, who is suing RBS for wrongful dismissal after being fired for trying to manipulate interbank lending rates.

The Department of Justice and New York State Attorney General Eric Schneiderman are among authorities investigating Credit Suisse over mortgage-backed securities, according to Reuters.

Mr. Schneiderman is said to have so-called tolling agreements with 12 banks, allowing the prosecutor to continue his investigation into mortgage-securitization practices at the firms beyond the statue of limitations.

Greek Prime Minister Antonis Samaras said his country will be out of cash by the end of November if it doesn't receive the next bailout installment from its European neighbors.

Spanish finance minister Luis de Guindos told an audience of academics that “Spain doesn’t need a bailout at all” ... and the academics laughed.

Dave & Buster's pulled its initial public offering yesterday, citing market volatility.

Junk bond issuers looking to pay interest rates with bonds instead of cash set off alarm bells, according to the Journal.

U.S. and European officials may step up sanctions against Iran after the nation's currency, the rial, fell 40 percent against the dollar over the last two weeks.

Put a $65 million bounty out for the man who can win the heart of your lesbian daughter, and all sorts of undesirables come calling. Sacha Baron Cohen, for instance ...

Mr. Biggs began his career in finance at E.F. Hutton in 1961, and started one of the first hedge funds, Fairfield Partners, four years later. In 1973, he went to work at Morgan Stanley, where he founded the firm's investment management unit and research department. Those accomplishments were plenty on which to build a reputation; 1999, he called the collapse of the tech bubble, cementing his legend.

Mr. Biggs was also the author of three books, including Hedgehogging, many people's favorite work on the hedge fund industry. In 2003, Mr. Biggs retired from Morgan Stanley, and bypassed the golf course and Greek isles to co-found Traxis Partners, a hedge fund: "I was doing it because professional investing is the best game in the world, and I relished the competition," he told Bloomberg in 2006.

"Barton left an indelible mark on our business, our culture and our shared notion of leadership at Morgan Stanley," wrote James Gorman, chief executive officer of Morgan Stanley, in the memo. "He was known as an independent thinker, colorful writer and one of the pioneers of emerging markets investing"

An ill-timed acquisition has made Credit Agricole the foreign bank with the most to lose in the Greek crisis.

Despite Spanish Prime Minister Mariano Rajoy's assertion that the matter of his nation's enfeebled banks was "resolved," yields on Spain's government bonds rose, and Fitch Ratings downgraded 18 Spanish lenders.

Italian Prime Minister Mario Monti is on deck.

Breakdown: Jamie Dimon testifies this morning at a Senate Banking Committee hearing on JPMorgan's recent trading losses. As we noted last night, Mr. Dimon's prepared remarks are dry stuff. Committee chair Sen. Tim Johnson, a South Dakota democrat, will ask “How can a bank take on ‘far too much risk’ if the point of the trades was to reduce risk in the first place?” according to Bloomberg, and Sen. Richard Shelby, the top-ranking Republican on the committee, will focus on specific nature of the trades. Other potential questions: How were executives in the chief investment office paid? And how involved was Mr. Dimon in the decision to change the way the CIO calculated its VaR, or the amount of money the office could lose on a given day?

Smith Barney no more: Morgan Stanley intends to drop the Smith Barney name from its retail brokerage, chief executive office James Gorman said yesterday. Morgan Stanley acquired a stake in Smith Barney, the firm that made "money the old fashioned way,"  in 2009, and plans to complete the outright purchase of Citigroup's remaining shares in the years to come. AsThe New York Timespoints out, Smith Barney joins Shearson, E.F. Hutton and Salomon Brothers among former Sandy Weill acquisitions to wind up on the scrap heap.

Moody's man: The Wall Street Journal has a go at profiling Gregory Winans Bauer, Moody's global head of banking, the man behind the potential ratings downgrades stalking the world's leading lenders. What did they find? "An avid yachtsman" leading 170 banking analysts neither as well known or highly paid as the bankers whose dreams they are currently haunting.

Gupta grilled: Rajat Gupta's daughter Geetanjali testified in Judge Jed Rakoff's courtroom yesterday. Would Ms. Gupta do anything for her father, a prosecutor asked on cross-examination? “I would do anything for my father, but I would not lie, though, on the stand,” she said.

Paper money: Syria released new Russian-printed banknotes into circulation, four Damascus-based bankers told Reuters.

Wipeout: The financial crisis knocked 39 percent off median household wealth, the Federal Reserve said yesterday, as the collapse of the housing market pushed net worth to 1992 levels.

Settled: The Treasury Department reached a $619 million settlement with ING Bank after the government charged that the Dutch lender breached U.S. sanctions against countries such as Iran, Libya and Cuba.

Naive!

When they say 'Whale':  Bruno Iksil, the JPMorgan trader nicknamed the London Whale and Voldemort for taking outsized derivatives positions, would sometimes run a VaR (value-at-risk, or a measure of how much a trade can lose in one day) exceeding $60 million—about the same VaR as the entire investment bank. The formula used to calculate Iksil's VaR was changed early this year, cutting reported risk in half.

The Commodity and Futures Trading Commission is using new powers gained in Dodd-Frank to subpoena e-mails and other internal documents in its inquiry into JPMorgan's chief investment office trading losses. The CFTC, which regulates derivatives trading, can take "take civil enforcement action in relation to deceptive statements, including misleading information given by traders to their in-house supervisors," according to the Wall Street Journal. Before Dodd-Frank, the CFTC lacked jurisdiction over fraud in the market for credit default swaps.

The hedge funds on the other side of the London Whale's trades aren't necessarily laughing to the bank. Take Boaz Weinstein, the hedge fund manager said to have "profited wildly" from the trade: Weinstein's Saba Capital is only up 2 percent for the year, according to Reuters, as plummeting stock markets likely offset gains.

Sorry, but...Nasdaq may have apologized publicly for the delays in trading on the day of Facebook's IPO, but it has done little to atone for $115 million in losses suffered by the offering's top four market makers (UBS, Citigroup, Knight Capital and Citadel Securities). The exchange is failing crisis management 101, says Reuters.

Only optional: Not all U.S. lenders took to heart an SEC memo sent in January requesting that banks clarify disclosures on exposure to troubled European countries, making it difficult for outsiders to guess the affects of sovereign defaults, eurozone exits and the like. The SEC memo merely offered "guidance," and didn't compel new disclosures. With Europe teetering, Peter Eavis suggests it's time that the SEC send a new memo.

Pit stop: Formula One Group, the London-based auto racing group that has been pre-marketing an initial public offering on the Singapore stock market, may join companies to postpone IPOs amid down markets. Kayak, the online travel company, and Graff Diamonds, the high-end jeweler, have delayed offerings in recent days.

Long wait: The Consumer Financial Protection Bureau, the new federal agency championed by Elizabeth Warren, is delaying new rules that would set standards in the mortgage industry until the end of the year. Uncertainty over the rules has contributed to a tight market for mortgage-backed securities.

Moves: Ian Lowitt, the last chief financial officer of Lehman Brothers, is joining Marex Group, a London-based private company that specializes as a commodities broker.

Falling out? NYSE Euronext approached Facebook yesterday about listing the company's stock on the New York Stock Exchange, a move which would be a bigger blow to Nasdaq than any punishment regulators dole out for bungling the first day in Facebook trading.

Meanwhile, plaintiffs' lawyers circled the offering, with one group filing a class-action suit asserting that Mark Zuckerberg and his bankers concealed material information from some investors. The flap arose, you'll remember, when reports surfaced that research teams at Morgan Stanley and other underwriters cut revenue guidance in the days leading up to the offering—but only shared that research with more preferred clients.

Whether those moves violated securities law falls into a gray area, the experts said. If research teams at Morgan Stanley and other investment banks cut guidance based on information in the publicly-filed S-1 document, it's likely that neither Facebook nor its bankers ran afoul of regulatory law. That doesn't mean it's good law.

Morgan Stanley CEO James Gorman took the unusual step of joining a May 17 conference call to discuss the pricing of the Facebook IPO. Facebook CFO David Ebersman sought to maximize his company's haul and limit the pop to 10 percent, unnamed sources told Bloomberg.

Top secret: Prosecutors called Byron Trott, the Goldman Sachs investment banker who landed Warren Buffett's $5 billion investment in the firm in Sept. 2008, to testify in the insider trading trial of former-McKinsey CEO Rajat Gupta. The government says that Gupta, who was a Goldman director at the time, tipped hedge fund manager Raj Rajaratnam to the Buffett deal, which Mr. Trott told the jury "was about as top secret as you can get." Discretion is not a quality lightly valued by Mr. Trott, who now runs his own investment firm. He's been known to fire underlings for talking business in the elevator, according to The New York Times.

Bankia bailout: The Spanish government will inject an additional $11 billion in Bankia SA, Spain's fourth-largest lender. That's encouraging. Economy Minister Luis de Guindos told Spanish lawmakers that Bankia "is a specific case and it's not correct to extrapolate its problems to the rest of the Spanish financial system." From this distance, that doesn't sound so reassuring.

Countdown to Grexit: A Citigroup analyst Willem Buiter is targeting Jan. 1, 2013 for Greece's exit from the eurozone. An aggressive policy response will likely keep other euro-exits, but won't stave off higher borrowing costs or recession, according to Buiter.

Big moves: Citigroup named Anthony Santomero, former president of the Federal Reserve Bank of Philadelphia, as chairman of its main banking subsidiary. He replaces Michael O'Neill, was in turn replaced Richard Parsons as Citigroup chairman earlier this spring.

JPMorgan is naming Joseph A. Walker senior vice chairman of its investment-banking unit. Mr. Walker spent 22 years at the bank before leaving in 2001, and led the firm's technology, media and telecommunications unit from 1998 to 2000.

Slow lane: A start-up is trying to lure mutual fund managers to a new stock exchange by prohibiting high-frequency traders.

Triple bogey: Membership fees are down at Tokyo's three top golf clubs, signaling tough times ahead for that city's commercial real estate market.

Long shot: An Australian bookie is offering 5-to-1 odds on Facebook finishing 2012 at $38 or higher.

The promotion has several ripple effects, including additional responsibilities for chief financial officer Ruth Porat, the subject of a gender-riffic profile in The Times in November. Let's go to the memo:

Frank Barron, who joined us in September as Chief Legal Officer, will take on added responsibility for coordinating our activities in Washington, D.C. Accordingly, our Government Relations Group led by Michael Stein will now report to him. Frank will also work with Marty Cohen, Corporate Secretary, and me on matters related to the Morgan Stanley Board of Directors, including the annual shareholders’ meeting.

Ruth Porat, Chief Financial Officer, will assume responsibility for the Global Sustainable Finance Group led by Audrey Choi. As its name suggests, this group spearheads our various initiatives around environmental sustainability, economic opportunity and community development, including compliance with the U.S. Community Reinvestment Act.

mtaylor [at] observer.com | @mbrookstaylor

Morgan Stanley Chief Executive James Gorman raised some eyebrows during a routine conference this week when he threatened to "personally escort" [out] anyone found leaking any details of the firm's compensation levels to the media, The Post has learned.

Gorman, who has been pushing hard to keep the lid on bonuses and has railed against the superstar mentality on Wall Street, unexpectedly read the riot act to about 500 managing directors during the usually staid year-end conference call, according to sources familiar with the call.

The Post also says Mr. Gorman has taken up boxing since assuming the CEO position at Morgan Stanley. This certainly helps his chances in a fight against an insubordinate employee, but also raises an important question. Who would win in a fight: Gorman the pugilist or former rugby player, "hand-to-hand combat" enthusiast and Bank of America CEO Brian Moynihan?

Meet the Newest Ultra-Rich Givers.>>

mtaylor [at] observer.com | @mbrookstaylor