Morgan Stanley: Gorman aims for the top on Wall Street


Helen Avery
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Morgan Stanley’s incoming CEO explains strategy; Mack and Chammah take new responsibilities

James Gorman: says Morgan Stanley is in a “great position”

James Gorman: says Morgan Stanley is in a "great position"

After just four years with Morgan Stanley, James Gorman will be taking over as chief executive from John Mack in January. Mack is continuing at the firm as chairman, and Walid Chammah, who at present is co-president with Gorman, will become president of the firm, and chairman of the international business, remaining in London.

Gorman says he views the new structure of three overseeing heads as "one of the better recent succession plans on Wall Street". In an interview with Euromoney, he says the structure, which differs greatly from that of most US banking firms, will ensure that there is more oversight of the business than if the firm was to have a single combined chairman and chief executive. "Having the three of us means we can divide and conquer, so there is no chance of anyone having to take their eye off the ball," Gorman says. "With me as CEO, Walid as chairman in Europe and John calling on major clients around the world it gives us a real multiplier effect."

Shared responsibility is likely to become commonplace on Wall Street. Among many other things, the demise of Bear Stearns and Lehman Brothers proved that having one man at the top is not sufficient oversight and that being the sole person in charge is not an attractive proposition should things go wrong.

New era

Despite Mack’s continued presence at Morgan Stanley, it spells a new era for the firm, which over 2007 and 2008 had fallen from standing shoulder to shoulder with Goldman Sachs as an investment banking and prime brokerage force to become a confused retail brokerage and inconsistent capital markets player.

Mack has had his critics over his (second) tenure at Morgan Stanley. He rejoined the firm as chief executive in June 2005, having left in 2001 to become chief executive of Credit Suisse First Boston.

July 2007
Return of the Mack
                       July 2007
But Gorman sees reasons to welcome Mack’s continued role in the company. "Critics point to the stock price as a gauge of John’s ability but that is a cheap shot," he says. "His tenure occurred over a peak-to-trough cycle, and Morgan Stanley is doing considerably better than most firms on Wall Street."

"With me as CEO, Walid as chairman in Europe and John calling on major clients around the world it gives us a real multiplier effect"

James Gorman, Morgan Stanley

Morgan Stanley is still in existence and Mack has to be credited with that. In June 2005 the stock price was around $40, while on September 21 this year it was around $30. Compared with Goldman Sachs’ increase in share price of about 75% over that timeframe questions should rightly be asked. But there are few firms on Wall Street whose share prices have risen.

Gorman also stresses that but for Mack the firm would never have been able to obtain funding from Japan or China at key moments. In December 2007, in order to cope with the sub-prime write-downs, the firm received a $5 billion capital infusion from China Investment Corporation in exchange for securities that would be convertible to 9.9% of its shares in 2010. And In September and October last year, Mitsubishi UFJ Financial Group, Japan’s largest bank, took a stake of $9 billion in Morgan Stanley equity.

Given that Mack can be credited with saving Morgan Stanley, it is somewhat surprising that his step-down from the chief executive role has prompted little agitation. Analyst notes report that the move was expected, that Gorman was the natural choice for the job, and that little will change for the firm. It is in stark contrast to the constant speculation over Ken Lewis’s succession plans for Bank of America Merrill Lynch.

To some extent, the hard work at Morgan Stanley has been done, so Gorman faces an easier task than perhaps a new chief executive of BofA will. In 2005, Mack hired Gorman two months after rejoining the firm and put him in charge of cleaning up the Dean Witter merger. The 1997 merger was still not bedded in, and Gorman got rid of 500 brokers and replaced 80% of managers. The much streamlined and more efficient brokerage was therefore well prepared when the opportunity to acquire a majority stake in Smith Barney from Citi arose last year. In 2006 Mack also spun off its Discover Card business, which had also been part of the merger.

"In just a few years, the business has completely changed," says Gorman. With the Smith Barney acquisition, Morgan Stanley is now the world’s largest wealth manager by assets under management. It is expected that Citi will sell the remaining 49% stake to Morgan Stanley, although without Citi’s retail distribution Gorman might need to look for a new commercial/retail banking partner if he wants to keep ahead of Bank of America Merrill Lynch and JPMorgan in the US .

Now that Morgan Stanley has a strong foundation for its wealth management/brokerage business Gorman will need to restore the institutional side of the business. Some progress has been made since last year, particularly in equities, where Morgan Stanley now ranks third in the Dealogic league tables for US equity and equity-related deals. But the firm still lags behind the leaders in US debt capital markets, ranking sixth for the first nine months.

Given Gorman’s expertise in wealth management from his days at Merrill Lynch, keeping an eye on the business that already has a strong foundation will be easier for Gorman than ensuring that Morgan Stanley ranks top in its institutional business. Last year was not a glorious one for Morgan Stanley in investment banking. In completed worldwide M&A transactions, the firm ranked third, and in the Americas it ranked seventh, falling from first place in 2007. In US equity deals for 2008, Morgan Stanley ranked eighth, and in US investment grade corporate debt, it ranked fifth.

"We won’t be able to achieve
first position every year,
but being in the top three
on both sides of the business
is a major achievement"

James Gorman, Morgan Stanley

There are signs that Morgan Stanley has recovered its poise this year however. The firm was second in announced worldwide M&A deals for the first three quarters of 2009, according to Dealogic, and now ranks first in the US. The firm was surprisingly missing from the roster of advisers in the Anglo American/Xstrata merger announcement, although now that deal looks as if it won’t come off, that can be argued away.

In equities, over the first three quarters of the year Morgan Stanley ranks second in the league tables for global equity and equity-related deals. But there is more work to do. The firm scrapes a fourth place ranking in US investment grade corporate debt in the first nine months of this year.

Given Gorman’s wealth management background, there are concerns that commitment or expertise will be lacking when it comes to investment banking. He is quick to rebut such suggestions. "The aim is to be number one, two or three in wealth management globally, and number one, two or three in M&A, capital markets and sales and trading globally," he says. "We won’t be able to achieve first position every year, but being in the top three on both sides of the business is a major achievement."

That is fighting talk. The competitive landscape is now sparser but tougher. Morgan Stanley is up against not just long-standing competitor Goldman Sachs but also a combined JPMorgan and Bear Stearns, a combined Bank of America and Merrill Lynch and a combined Barclays Capital and Lehman Brothers. How Gorman intends to ensure that Morgan Stanley ranks consistently top in investment banking is unclear but perhaps that is where Chammah and Mack will support him in his initial time as chief executive.

The knack

Gorman has a knack of making businesses perform, and right now he is confident that Morgan Stanley is in a better position than many Wall Street firms to take advantage of the new market environment. "There is no better time, in my mind, for Morgan Stanley," he says. "The industry has lost players and has consolidated, and we are among the top remaining players.

"In addition, the large institutions are where the capacity and demand is. Boutiques may be springing up, but they will also have to deal with the Bernie Madoff effect, whereby non-branded semi-institutions face a sort of ‘buyer beware’ reputation. We’re in a great position, and I’m feeling quite optimistic."

See Abigail Hofman: Morgan Stanley's succession story for her take on Gorman’s promotion at Morgan Stanley