Over in big bad bank land, the going remains tough. Morgan Stanley was the latest bank to announce big job losses. In January, the firm initiated 1,600 job cuts in addition to the large head-count cull that it undertook last year. Apparently, a large number of managing directors and executive directors will be shown the door in both the investment banking and trading areas. No one grieves when an investment banker loses his or her job. But what people are worrying about is a new compensation scheme that Morgan Stanley announced in mid-January whereby employees earning more than $350,000 in total whose bonuses were at least $50,000 would have 100% of their annual bonus deferred over three years. Lower disposable income on Wall Street affects numerous hangers-on lower down the food chain: think estate agents, car dealers, top-end tailors and watchmakers.
The new Morgan Stanley compensation scheme is shocking or wonderful depending on whether you are a shareholder or an employee. It gives the bank much more power to claw back compensation and also probably makes it more expensive for rivals to poach Morgan Stanley staff. In future, Morgan Stanley deserters will have a lot of deferred compensation that will need to be bought out by a new employer. The question is whether or not Morgan Stanley will be a lone wolf in this new compensation policy or has set the benchmark for the industry in the new normal.
It is three years since James Gorman took the helm at Morgan Stanley and the firm is still in transition mode, offering investors a mediocre 6% return on equity as it builds the wealth management franchise and tries to revive its institutional securities business. Some wonder whether Gorman will do a ‘mini-UBS’ and close down certain of the less profitable fixed-income businesses. For me, despite much better than expected fourth-quarter results, Morgan Stanley’s future is not clear. If markets improve and there is a sustained risk-on environment with a big move out of bonds into equities, the firm will receive a get out of jail card. But how likely is that in a low-growth environment? It is more likely that the firm will stumble along for the next few quarters and then face a cathartic crossroads that could bring substantive change.
One mole talks about demerging the two main business lines, with Colm Kelleher running the investment bank and Gorman at the helm of the stand-alone wealth management business. We will see. But in the meantime, Gorman was given a warm hug (metaphorically speaking) by hedge fund manager Daniel Loeb, who announced a stake in Morgan Stanley and insisted that the company "was in the early innings of a turnaround".
Meanwhile, rival Wall Street firm Goldman Sachs announced good fourth-quarter earnings. Profits almost tripled to $2.8 billion. A lot of this improvement resulted from a surge in revenue from the bank’s own portfolio that might not be repeatable. Employees however are unlikely to be dancing the can-can, as fourth-quarter compensation expenses were reduced by 11%. For a while now I have been expecting Goldman’s chief, Lloyd Blankfein, to go. I have been wrong. Perhaps loyal Lloyd will turn out to be the great survivor: surfing effortlessly over the unruly waves of regulators’ distrust, public fury and media derision (remember the vampire squid analogy that went viral). "He has completely toughed it out," a former employee told me. "And when you look at the four or five guys jostling to take over, they don’t look as well qualified as Lloyd. What’s more, Lloyd is completely committed to being there." I have to admit that if Goldman has another great quarter, Lloyd’s detractors might retreat into the undergrowth.
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