|Morgan Stanley New York Headquarters|
Morgan Stanley’s CEO, James Gorman, has transformed the firm and its reputation. Traditionally an investment bank, Morgan Stanley is moving away from its original model and investing more in its wealth management and asset management businesses. So much so that today, these two facets of Morgan Stanley’s business model account for 50% of its total revenues, up from 27% in 2006. This is part of a larger trend in the financial industry as a whole. Firms are eliminating their riskier tendencies and amplifying their more reliable components.
Morgan Stanley was hit hard in the late 2000’s. Its reputation was marred in 2007 when it lost $9 billion in a complex mortgage trade and it barely weathered the 2008 financial crisis. Upon assuming his role as CEO in 2010, Gorman made some significant and perhaps lifesaving changes to the firm. He (1) increased the firm’s wealth management and asset management businesses, (2) reshaped the firm’s trading business, and (3) trimmed the firm’s international outposts, as part of a larger cost-cutting scheme.
Just before becoming CEO, Gorman initiated the $9 billion purchase of Smith Barney from Citigroup, doubling the size of Morgan Stanley’s wealth management division. The purchase was completed earlier this year, and signifies a larger momentum shift within the firm. Gorman wants to be able to rely on sound elements of the firm in the event of another financial crisis.
Morgan Stanley has put less emphasis on taking risks. Gorman has stripped the firm of its four proprietary trading desks. This, coupled with minimal bonuses and increasing regulations with which to comply, has resulted in a shift in employee morale. Many traders are leaving the firm to work at hedge funds and private equity companies. Gorman considers employee compensation as a reflection of stockholder returns. The firm is not yet in the position to offer the salaries that traders desire and Gorman believes Morgan Stanley will endure without its big-ticket talent. As the number of traders has dropped since the financial crisis, the number of employees in risk management has doubled. The firm is "taking risk management to a completely different level so we'd never again have the kind of…exposures that got us in trouble," Gorman says.
Morgan Stanley’s recent changes have been met with considerable pushback. Within Morgan Stanley, there are now high levels of trader attrition. The firm’s makeover has gotten criticism outside of the firm as well. Morgan Stanley’s elite reputation was put into question as it launched its new policies. Despite the lingering judgment, Gorman hasn’t hesitated. “All I care about is doing what we think is right for Morgan Stanley," he says. "The fact that someone takes a different road is not that relevant."
|Morgan Stanley CEO, James Gorman|
Numbers wise, the firm is still recovering from the financial crisis. Its market valuation in mid-2007 was $90 billion, whereas now it is $53 billion. Its precrisis stock price was $85, now it hovers at $27. The firm’s balance sheet declined to a third its size since before the crisis.
Morgan Stanley’s cultural adjustment will take time to marinate among employees.
In the long run, Gorman’s changes will transform Morgan Stanley into a sound financial institution, ready to take on the next inevitable global crisis.
Written by: Lynn Bernabei
Written by: Lynn Bernabei