Author: Antony Currie
Until recently, bad news for Morgan Stanley was more trivial – sex discrimination lawsuits brought by women who felt they were being passed over for promotion simply because of their sex, the sacking of analyst Christian Curry, which raised allegations of cheating on expenses, racial discrimination, private eyes lurking in parks at night, and Curry’s appearance in a gay porn magazine.
But a train of events linked to junk bond problems have left the once untouchable firm looking decidedly sullied. It has missed analysts’ earnings consensus in the last two quarters and has been the subject of rumours of massive high-yield debt losses at the same time as three of its most senior fixed-income managers suddenly decided to resign.
Peter Karches, president of the institutional securities business and long-time confidant of Mack was first to go last fall. Within a couple of weeks Kenneth DeRegt, worldwide head of fixed income, also resigned. Both sat on the firm’s executive board. Then, in October, it was the turn of the head of leveraged finance, Dwight Sipprelle, to go.
Three weeks after announcing third quarter 2000 earnings, despite being asked about proprietary losses on the analysts’ call more than once, and despite weeks of rumours that the firm had lost up to $1 billion, Morgan Stanley finally admitted to losing $45 million in high-yield that quarter. It wasn’t a great deal, but some analysts were furious. One investor Euromoney talked to accused the firm of being misleading.
The losses came from its high-yield portfolio, controlled in part by Sipprelle. Curiously, when it finally did admit the loss, it also warned it would lose roughly the same in the fourth quarter. Rivals are not convinced that this is the whole story. “That’s the loss they’re registering after taking into account the money they’ve earned in underwriting, sales and trading,” says one. “That could put their actual portfolio losses at $300 million a quarter or more.”
Having lost two of his closest allies, Mack was increasingly isolated. Reports say he tried to enforce a gentlemen’s agreement, made with chief executive Philip Purcell at the time of the merger four years ago, that Purcell would hand over the reins within five years. Purcell denies any such agreement. In any event, the board backed Purcell by accepting Mack’s resignation.
The man who succeeds Mack is Robert Scott, the CFO who so neatly side-stepped analysts’ questions on proprietary losses. An old hand from Morgan Stanley, he should provide some comfort to the investment bankers, if not to analysts. His role as president is not as large as Mack’s; all the securities business heads will report to Purcell. As for Mack, if he decides not to cash in his half billion dollars in Morgan Stanley stock, there are plenty of banks who’d love to have him. Current bets favour a relocation to Charlotte.
