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Digg
Sorry to pick on Morgan Stanley again.
But judging from today's mediocre 3Q earnings, it's pretty clear that this bank just can't deliver the goods.
By now, it's almost embarrassing to keep comparing Morgan to its richer, roguish downtown rival: Goldman Sachs.
Mere months ago, Goldman was caught in a Texas death-match with Congress over the Abacus CDO. But somehow it still escaped to post profits of $1.9 billion.
Morgan Stanley has 80% of Goldman Sachs revenues. This quarter, its profits were just one-fifth of Goldman’s.
Predictably, Morgan CEO James Gorman isn't happy. “Our results do not reflect the true potential of Morgan Stanley's global client franchise and I am not satisfied with our overall performance,” he said today.
If that sounds familiar, it should. Former Morgan CEO John Mack was superb at serving up soothing words for Morgan's bad performance.
Remember Mack refusing a bonus after Morgan lost $6 billion on a bad bond call in Q4 2007?
Or apologizing for Morgan missing the great market rebound of the Spring of 2009?
Which begs the obvious question: when, if ever, will Morgan Stanley get its act together?
Now, it might seem a little unfair to pound on CEO Gorman. Wall Street is coping with a chaotic, massive re-regulation of its business. He's been in his post for only thirteen months.
But it was Gorman's strategy to re-make Morgan Stanley in the image of the old Merrill Lynch. It was his big push into wealth management that got the Morgan Stanley Smith Barney joint venture done. And it was his call to undertake an expensive re-build of Morgan's fixed income sales and trading franchise.
And so far, Gorman doesn't have much to show for his efforts. Certainly, not in terms of profits. Morgan Stanley will be lucky to hit a double-digit return on its equity this year. By contrast, Goldman's ROE is 13.2% year-to-date.
Consider the cumbersome Morgan Stanley Smith Barney JV. Gorman now controls 18,119 global wealth representatives. Combined those reps generated a measly $281 million (or $15,500 per rep) in third quarter pre-tax profits for Morgan Stanley.
The wealth management business is supposed to embody Morgan's bright, shining, low-risk future. But the JV's pre-tax margin of 9% is less than half of Gorman's 20%-plus target. Perhaps worse — 3Q profits were unchanged over last year.
On today's investor call, Gorman served up the usual platitudes. Investors were skittish. The trading environment was terrible. Morgan Stanley was a “work in progress” and “in a transition period.” The bank was in the “right mix of businesses”, focused on “not making mistakes” and looking “long term.”
And no doubt, this is all true. But somehow in spite of all the macro uncertainty and terrible trading environment, Goldman handily beat earnings expectations, while Morgan Stanley came up short.
Fans of Morgan Stanley will argue that the Goldman comparison is unfair – that Gorman is transforming Morgan Stanley from a trading house to a diversified financial institution – a “new” bank for a “new” Wall Street.
But so far it's awfully hard to find much “new” in Morgan Stanley's numbers. It's still risky: Morgan's average 3Q Value-at-Risk averaged $189 million and dwarfed Goldman's at only $121 million .
And, it's still paying out too much in bonuses: the “new” Morgan is setting aside 49% of its net revenues for comp and benefits, while Goldman sets aside just 43%.
In three months time, we will hear again from Mr. Gorman with Morgan Stanley's year-end results. Here's my bet: barring a monster fourth quarter rally, Morgan Stanley's “results will not reflect the true potential of its global client franchise.”
At Morgan Stanley, there may be a new CEO, but unfortunately the song remains the same.
Previous Mean Street columns on Morgan Stanley:
Let Us Now Praise John Mack
John Mack's Final Folly, Morgan Stanley Smith Barney
A Wall Street Conspiracy? Of Course
The Greed That Ate Morgan Stanley
Read Full Article »