Newspaper article International Herald Tribune

Fears for Morgan Stanley's Future Grow ; Staff Cuts Are Latest Sign Bank Is Struggling with New Realities of Wall St

Newspaper article International Herald Tribune

Fears for Morgan Stanley's Future Grow ; Staff Cuts Are Latest Sign Bank Is Struggling with New Realities of Wall St

Article excerpt

The bank's strategy is raising questions among some on Wall Street about whether it should spin off or ditch much of its trading business.

When Morgan Stanley's top executives gathered in mid-September at a hotel in New York to discuss strategy, some participants complained that the room was too small.

Apparently, that was the point: James P. Gorman, Morgan Stanley's chief executive, chose the cramped quarters to force discussion among the executives, said people briefed on his decision but not authorized to speak on the record.

These days, it is the Wall Street firm that is finding itself a bit boxed in.

Regulatory demands, weak markets and lower credit ratings have weighed on all Wall Street banks, but perhaps more so on Morgan Stanley, the smallest of the big Wall Street firms. In the three years that Mr. Gorman, 54, has been at the helm, the bank has been progressively shrinking its business of trading bonds, commodities and other investments and expanding into wealth management.

Now the storied company -- whose take-no-prisoners trading desks have at times been rivaled only by firms like Goldman Sachs -- is cutting even deeper, raising questions among some on Wall Street about whether it should spin off or ditch much of its trading business as has UBS, its Swiss rival, a suggestion the firm rejects.

Morgan Stanley is planning another deep round of cuts: 1,600 jobs, accounting for 6 percent of its support work force and, more telling, 6 percent of institutional securities, which includes its once vaunted trading business.

The planned cuts come just a week before the release of fourth- quarter earnings, which are expected to show that the firm has made gains since the financial crisis in areas like stock trading, banking and wealth management but that it is still weighed down by the diminished earnings power of its fixed-income business.

The question of whether the company can avoid shrinking further - - and a number of analysts say that additional cuts will be needed - - and revive the fixed-income trading business will have significant ripple effects in the financial world.

While the strategy of cutting in some places and building out wealth management may lead to a more stable company, the retreat also means that the overall fixed-income trading business is becoming increasingly dominated by two Wall Street banks -- JPMorgan Chase and Goldman -- as well as by hedge funds and other investment firms that are more lightly regulated than banks like Morgan Stanley.

Before the financial crisis, the fixed-income division at Morgan Stanley, which was created by J.P. Morgan partners when Depression- era laws forced them to split banking from trading, was one of the firm's biggest moneymakers. Now, it is a drain on operations, producing just 20 percent of its revenue but tying up roughly half of its capital.

In recent years, the fixed-income department has not been able to make enough money to cover the cost to Morgan Stanley of this capital, according to people briefed on the matter but not authorized to speak on the record.

The fallout can be seen in compensation: a year ago, 110 of about 500 managing directors in sales and trading did not get a bonus, and that number is expected to grow next week, when bonuses are handed out.

Still, Mr. Gorman has received high marks from some on Wall Street for playing a difficult hand after the financial crisis. On Wednesday, he received a big vote of confidence when Daniel S. Loeb's hedge fund, Third Point, told investors that it was taking a stake, saying that Morgan Stanley was "in the early innings of a turnaround."

Still, hobbled by the new realities on Wall Street, that turnaround has so far proved to be a Sisyphean task.

The stock, said Christopher Grisanti, a shareholder, has "languished." Mr. Grisanti is the owner and co-founder of Grisanti Capital Management, which owns 690,000 shares of Morgan Stanley, valued at $13. …

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