Morgan Stanley

The trouble with being a broking house such as Morgan Stanley is that you can’t play politics in the same way Citigroup, JPMorgan or Bank of America can. No “Look how many small businesses we’re lending to” or “We modified a million mortgages last year”. Brokers are purely in the game of making rich institutions and individuals richer. Hopefully, along the way the investors will make money too.
Which means performance is everything. And the reality is that Morgan Stanley’s shares have trailed rival broker Goldman Sachs by 70 per cent over the past five years. While the banking index has more than doubled since the nadir in prices in 2008, Morgan Stanley stock has only risen by a fifth. That is not good enough. So 12 months ago a new chief executive, James Gorman, was installed to turn things round.
Full-year results on Thursday highlight how difficult a task this is. Morgan Stanley still has three big problems. The first is sales and trading. Every bank on Wall Street
knows that unless they’re in the top three in the mega-flow businesses such as rates, foreign exchange and commodities they’re wasting their time. Morgan Stanley, therefore, is not the only one frantically trying to get there. And the pie up for grabs is shrinking. Morgan Stanley made $9bn in revenues in fixed income in 2006. This year it made $5bn.
Second, wealth management has to deliver. Full-year operating margins were just 9 per  cent, supposedly due to costs related to the integration of Smith Barney. Morgan Stanley must quickly achieve its promise of 20 per cent or questions will be asked about
whether something else is wrong. Finally, the broker seems bloated. Headcount is 45 per cent higher than in 2006 yet net revenues are the same. Mr Gorman has a busy year ahead.
FINANCIAL TIMES

Read More

Morgan Stanley Defers 60% of Bonuses

Morgan Stanley has sought to pre-empt new rules capping cash pay-outs on Wall Street, deferring 60 per cent of employees’ 2010 bonuses.
The announcement came as the bank reported a higher-than-expected 88 per cent jump in fourth-quarter profits in spite of a fall in fixed income trading revenues.
Proponents of deferred pay argue the practice can help dissuade bankers and traders from taking excessive risks by chasing short-term profits.
While Morgan Stanley’s 2010 pay-outs may defer more than employees have come to expect – or would like – the move reflects the new realities of Wall Street after the financial crisis.
"It is the way things are going to be," said Jeanne Branthover, who heads the financial services practice at Boyden Global Executive Search. "What we are really seeing in this year’s bonuses is the change that took place because of the crisis. Every firm wants to keep their cash as long as they can."
Details on bonus deferrals have been a closely-guarded secret and have varied widely from bank to bank – one of the reasons some regulators are pushing for more specific rules.
European officials agreed 40-60 per cent of bank executives’ pay should be deferred over three to five years, and their US counterparts are now weighing the adoption of a similar ratio.
The Federal Reserve, the Securities & Exchange Commission, the Federal Deposit Insurance Corporation and other US agencies are close to finalising their own rules. Last year’s Dodd-Frank financial reform legislation gave US regulators until April to set new rules.

Bank bonuses

FT In depth: Remuneration for executives and employees remains under scrutiny
Morgan Stanley paid out $16bn in salaries, bonuses and benefits in 2010, or about 51 per cent of revenue. These costs totalled $14.4bn, or 62 per cent of revenue, a year earlier.
The bank’s announcement was the first time it had revealed what portion of its total bonus pool will be deferred. Previously, only top executives’ deferrals were disclosed. People close to the situation said Morgan Stanley’s staff will hear about the size and composition of their bonuses on Thursday.
Morgan Stanley did not disclose the precise form 2010’s deferred pay-outs would take. In 2009, the bank gave out restricted options that vest after three years and cash that is held by Morgan Stanley for a similar period and is subject to "clawbacks" if the employee underperforms.
Large financial institutions typically defer 20-60 per cent of year-end bonuses, depending on the size of the pay-out.
Morgan Stanley’s plan to defer 60 per cent, “seems high, but it could be the norm,” Ms Branthover said. “We’ll see.”
FINANCIAL TIMES - January 20 2011

Read More

Volcker rule

At the pace of a brisk glacier, the US Volcker rule is taking shape. This week the US Financial Stability Oversight Council released its recommendations on how to create the rules that ban banks from proprietary trading, and from investing in private equity and hedge funds. It wants them to be “consistent”, yet “account for differences”, and “dynamic” yet “predictable”. A mere 81 pages of these suggestions later, the final laws promise to be a maze of regulation. But while few investors will shed a tear for any banker who complains about being policed into oblivion, they should ask whether these rules will indeed succeed in reducing systemic risk.
The FSOC’s recommendations include a plethora of internal controls and reviews that themselves require reviews. Chief executives must also sign off on the entire compliance system. This smacks of another piece of dubious post-crisis legislation: the Sarbanes-Oxley Act. The 2002 rules, brought in after accounting scandals at Enron and WorldCom, mandated an onerous compliance burden. But while audit partners love the chargeable hours, privately they doubt the rules add much of a safety buffer. Lehman Brothers still managed to use  accounting gimmicks to hide the true state of its finances.
There will be much argument in the coming months over the wording of the Volcker rule, particularly where and how to draw the line between banned proprietary trading and allowable market making and hedging. Regulators are already finding this to be harder than they thought and even though some banks have begun to carve out their trading divisions in anticipation of the rules, the deeper problem of the Volcker rule remains. It attacks businesses that actually weathered the crisis relatively well without addressing the bits that almost destroyed the industry.

Read More

Fund a ‘sticking plaster’ for job cuts

A flagship government investment fund aimed at rebalancing the economy could prove no more than a “sticking plaster” over the wound created by public sector job cuts unless dismantled regional power structures are rebuilt, business leaders say.
After abolishing regional development agencies outside London with an annual budget of ?1.5bn, the coalition government has offered a fund of ?1.4bn over three years to help areas lessen their dependence on the state.
But amid signs that the money is being earmarked for “ribbon-cutting projects” that provide jobs quickly rather than permanently, business leaders involved in local enterprise partnerships, the RDA’s successors, have expressed concern.
Neil McLean, chairman of the Leeds City region Lep, the country’s largest, and Leeds manager partner of lawyer DLA Piper, said: “Does a lump of money get thrown out there as a sticking plaster or is it a part of a long-term strategy for sustainable growth?”
James Newman, chairman of the South Yorkshire Lep, said the regions needed to be weaned off public money but were in danger of being abandoned just when they could drive export-oriented, manufacturing-led growth. He added that he had discovered the criteria only last week, when he chaired a road show with Lord Heseltine, chairman of the panel assessing applications.
“London, Wales and Scotland have local autonomy and the money to do it. The English regions seem to be the only ones not trusted by the government to run their own economies,” he said.
Mr Newman warned that business confidence had been hit by the rapid destruction of the RDAs and that business could disengage unless Leps were shown to be more than powerless talking shops.
The regional growth fund opens for business on Friday amid evidence it will be oversubscribed and focus on short-term job creation over long-term stimulus.
The Financial Times has found that bids exceeding the ?250m allocated to the first tranche have come from just nine areas alone ahead of today’s deadline.
There are 28 local enterprise partnerships co-ordinating bids, covering about
two-thirds of the country. Any company requesting a minimum ?1m is also free to apply. The 20 Leps that replied to FT questions are submitting well over 100 bids between them.
They range from funding small business loan schemes and training to improving railway stations, kickstarting housing developments and building rail lines.
Other bids seek to create centres of excellence and one to improve Dudley zoo in the West Midlands.
However, many would not disclose details, citing commercial confidentiality.
Sir Ian Wrigglesworth, deputy chairman of the panel, said: “The object of this fund – where people have got it so wrong – it’s a short-term strategy to create private sector jobs in areas hit by cutbacks in the public sector.”
He added: “This isn’t about bypasses and big infrastructure projects; that has nothing to do with this fund.”
He said a factory about to be built was much more appealing than a very longterm proposal. “We aren’t an RDA,” he said.
Housing and transport bids would not qualify “unless they are going to create sustainable private sector jobs and business”.
Yorkshire’s chambers of commerce this week warned against creating jobs that could disappear in a year.
Mr Newman, who is a Sheffield businessman, said: “There will be a lot of people disappointed. This first tranche is for projects not programmes. They want ribbon-cutting projects.
“Lord Heseltine was very clear it had to create jobs, create them now and you would not get some of the money until you demonstrated you were going to create the jobs.”
Companies including Jaguar Land Rover, Bosch, the German engineer, and St Modwen, the property developer, are among those seeking money.
The deluge of bids is unsurprising. As one participant said: “They are just frightened somebody else will mop up the cash.”
However, Sir Ian said the fund was part of a “longterm strategy to rebalance the economy in regions too dominated by the public sector”.
Department for Business officials stressed that later rounds of the fund could be  used for longer term projects.
Financial Times (UK)

Read More