Best investment bank 2015: The reinvention of Morgan Stanley

Under the leadership of James Gorman, Morgan Stanley has carved out a unique position in global banking. It remains a great investment bank. Its much-maligned FICC division now looks fit for purpose. And its US wealth management arm gives the firm new stability and strength. Most important of all, the disparate parts of a once-divided business are delivering the benefits of the whole firm. And the markets are starting to realize the potential of a new Morgan Stanley as well.



At the end of every working day, James Gorman picks up a plastic folder and takes out the top sheet of paper. In an era when everything has become electronic, the sheet is something of a throwback. The half dozen lines that run from top to bottom are hand-drawn. The spidery numbers within it are written by Gorman’s own hand. 

These are the key end-of-day numbers for Morgan Stanley, the business that Gorman runs. Since he became chief executive in 2010, Gorman has religiously written down those numbers more than 1,200 times. 

In those 1,200 working days, and countless weekends besides, Morgan Stanley has been transformed under Gorman’s leadership. When he took over as CEO, the bank had been through a near-death experience during the financial crisis just two years earlier. 

A big investment from Japan’s MUFG and the purchase of the Smith Barney retail business from Citi helped to steady the ship. But Morgan Stanley faced two big, related problems: the markets did not know what the firm was; and even many of the firm’s employees weren’t sure what it wanted to be either. 

Previous CEO John Mack had put the building blocks in place to rebalance the business. But the firm under Gorman did not deliver for some time. Margins in the new, enlarged wealth management business were in the low teens, poor for a division with $2 trillion in assets. While Morgan Stanley’s advisory and equities divisions continued to perform well, quarter after quarter results were hampered by a FICC business that hardly seemed fit for purpose. And the investment bank struggled to bring the whole firm to its clients, in part because of the uneasy relationship between the two bankers who ran it – M&A specialist Paul Taubman and markets veteran (and former CFO of the firm who played a key role in pulling Morgan Stanley out of the financial crisis) Colm Kelleher.

Then there was Gorman himself, the ex-McKinsey consultant and former head of wealth management at Merrill Lynch, brought in by Mack in 2006 to sort out the mess of its own wealth business – itself the legacy of the hated era following the firm’s merger with Dean Witter Discover, which many felt had ripped the heart and soul out of a once-great franchise. 

It hasn’t been an easy ride. Gorman admits that, even during the first two years of his leadership of the firm, many saw him as an outsider. "I was acutely aware of it," he says. "It was entirely understandable. This is a very proud institution." Some people clearly thought one of their own should be running the firm.

A crunch point came in February 2013. Gorman had bet his career on the new model and needed to convince investors. He could not start to do that until he was sure his own staff were onside.

He called a meeting of the firm’s top 250 senior managers across all business lines. The strategy was presented. The senior managers were given the chance to vote, anonymously, on whether or not they supported it. 

The result was clear-cut: 97% voted in support. "As soon as I saw the result, I knew we were on the way to getting where we needed to go," says Gorman. 

For the past three years, those watching Morgan Stanley closely would have noticed a change, even if the group-wide return on equity numbers remained steadfastly disappointing in the mid-single digits. 

The wealth management division benefitted hugely from the merger with Smith Barney to become a clear leader in the US. Capital markets and financing divisions began to fire, and were no longer the poor relation of the advisory arm. Kelleher took a firm grip of the FICC division and remorselessly reduced it to a much more manageable size for the current regulatory environment – from $9 billion of revenues, or 32% of the business, in 2006 to a little over $4 billion in 2014, or just 12% of firm-wide revenues. 

And perhaps most remarkably of all, given the history of the firm, the investment bankers started not just to see but to tout the benefits of the wealth management arm to both the overall firm and to their own side of the business. 

Much of that flows down from the top management team. The three senior leaders of the business – Gorman, Kelleher and president of wealth management Greg Fleming – clearly get on well. There’s a great deal of mutual respect. Each has had a long, varied and successful career. These are not banking automatons: all three are quite likely to take the conversation off on a tangent and talk about something completely different. But when they are on message, they are sharp as tacks and straight to the point – and often thought-provoking, too.