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Opinion

Abigail Hofman: Identity crisis at Morgan Stanley?

Morgan Stanley’s fixed-income traders have not excelled and in 2009 the firm has failed to capitalize on opportunities in the flow businesses

Sometimes I get it right and sometimes I get it wrong. As in any job, the key is not so much to be infallible but to have more successes than misses and when you make a mistake, admit it. Morgan Stanley’s fixed-income division is one thing that I recently called correctly. In my May 2009 column, I highlighted Morgan Stanley’s weak first-quarter trading revenues and wrote: “I am still not convinced that the firm has the right top team in place in its fixed-income trading and sales operation.”

I was criticized by certain insiders for these remarks on the grounds that future quarters would show the skill of the firm’s traders. As far as I am concerned, Morgan Stanley has had problems in fixed-income trading for the past two years. The firm announced a sizeable 2007 fourth-quarter loss due to proprietary trading in sub-prime securities and in November 2007, Zoe Cruz, co-president and head of the institutional securities division, was abruptly fired. Some question whether this dismissal was appropriate. There was an overtone of desperately seeking a scapegoat. After all, Cruz had enjoyed an outstanding 25-year career at the firm and in a period of market turmoil, continuity is an attribute. Since her departure, Morgan Stanley’s fixed-income traders have not excelled and in 2009 the firm has failed to capitalize on opportunities in the flow businesses. This might be a result of a misplaced desire to remain close to shore or, more ominously, a failure by senior management to spot key industry trends. In any event, an opportunity has been missed. An insider told me: “Our strategy is different now from some of the big flow-trading houses. We have made a significant move to expand our wealth management franchise and, over the cycle, this will pay off.” In a way, Morgan Stanley is suffering an identity crisis. The firm needs to decide whether it is an institutional securities dog with a retail brokerage tail or a retail brokerage dog with an institutional securities tail. I don’t see it becoming a firm of two equal parts: one culture and approach will dominate. This dilemma will affect, or indeed could be decided by, the choice of a successor to John Mack, the firm’s chairman and chief executive. I expect Mack to relinquish his chief executive role within the next 18 months, although he might remain chairman.

In late July, Morgan Stanley announced the welcome news that it was hiring former CSFB trading star Jack DiMaio to head its interest rate, credit and currency trading area. DiMaio left Credit Suisse in 2005 to found a hedge fund, DiMaio Ahmad Capital. Morgan Stanley has lured him back to the mainstream by taking a minority stake in the hedge fund. I am not a fan of such manoeuvring, which smacks of Citi’s decision to acquire Vikram Pandit Old Lane hedge fund at a ludicrously inflated price. But I give Morgan Stanley’s management credit for acting decisively and hiring a talented outsider. A source describes DiMaio as: “The brightest guy on the planet.” I look forward to meeting this paragon. A Morgan Stanley mole, who knows me well, emailed a pithy punch-line: “You will like DiMaio,” Mole wrote. “He is charming and good-looking. He used to be a semi-pro baseball player! “

Of course, I couldn’t possibly allow a handsome physique to influence me. But then, on the other hand, isn’t that how women are judged most of the time – which brings us back to GQ magazine featuring Mrs Jenkins in her underwear!

How was your month? Please send news and views to Abigail@euromoney.com

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