Four years after a corporate coup brought John Mack back to Morgan Stanley’s chief executive suite, a less dramatic succession took place at 1585 Broadway last month. The bank appointed James Gorman, co-president and head of wealth management and asset management, to succeed Mack as CEO in January.
And now the real drama begins.
Gorman, who has been groomed for the top job for some time, faces a more daunting challenge than his predecessor did when he started. Mack took charge with the goal of healing a longtime rift between Morgan’s white-shoe bankers and its retail brokers, a problem that had plagued the firm since its merger with Dean Witter, Discover & Co. in 1997. He did so by ramping up risk-taking just as the credit boom was reaching its peak, a move that would force the firm to take a massive $44 billion in write-downs on mortgage-backed securities and other toxic assets. A chastened Mack then dialed back risk so aggressively that the firm missed the market rebound that goosed up Wall Street trading profits in the first half of this year. Some critics say the repeated missteps amount to a “lost decade” for the bank.
Gorman, a blunt native of Australia, dismisses talk of decline. “The ‘lost decade’ is a gross exaggeration,” the 51-year-old management-consultant-turned-banking-executive tells Institutional Investor in an interview. “We remain one of the two premium investment banks and emerged as the largest wealth manager in the world. If that’s a lost decade, then I will take it.”
[Click here to hear Institutional Investor report Xiang Ji’s audio interview with James Gorman as he discusses Morgan Stanley’s future.]
As part of the transition, Mack will stay on as chairman for at least two years. The other contender for the CEO spot, co-president and head of investment banking Walid Chammah, will remain chairman of Morgan Stanley International in London.
A former McKinsey & Co. executive, Gorman has a reputation for strategic insight and solid execution skills. As head of Merrill Lynch’s brokerage division from 2001 to 2005, he almost doubled pretax profit margins, from 12.2 percent to 20.0 percent. Mack hired him in 2006 to turn around Morgan Stanley’s underperforming brokerage, and he doubled pretax margins from an average 7 percent from 2001 to 2005 to 16 percent in the second quarter of 2008, before market turbulence pushed the division into the red.
Gorman has been focusing on integrating Morgan Stanley’s brokerage with that of Citigroup’s Smith Barney since Mack agreed in January to merge the two businesses and pay Citi $2.7 billion for a 51 percent stake and management control. With 18,444 brokers and $1.4 trillion in client assets, the new Morgan Stanley Smith Barney is the largest U.S. retail brokerage firm, ahead of Bank of America–Merrill Lynch. Gorman aims to cut $1.1 billion in costs and generate $275 million in revenue synergies to achieve a 20 percent pretax margin by 2011. He has also been working to turn around the ailing asset management division, which now manages some $361 billion.
Mack has sought to grow brokerage and asset management to give Morgan a more stable earnings base. Gorman’s businesses generated 46 percent of the firm’s net revenue of $8.5 billion in the first half of this year. The key question for Morgan, however, is whether Gorman can revitalize its core investment banking franchise, particularly its underperforming sales and trading operations — areas in which he has no hands-on experience. “We expect appropriate risk-taking and returns,” says one fund manager who holds Morgan shares and spoke on condition of anonymity. “Gorman will need to show results here.”
The CEO-designate visited the bank’s equity trading floor the day after his promotion was announced to demonstrate his commitment to the business, and won a standing ovation from traders. “Morgan Stanley’s DNA is in institutional securities,” he notes.
Gorman will need to shift Morgan’s trading performance up a gear or two. Rivals flourished with a recovery in financial markets in the first half of this year and the recent diminution in competition. Goldman, Sachs & Co. boasted net revenues of $13.4 billion in fixed income, currency and commodities and $5.2 billion in equities in the first half. Such revenues were $7.5 billion and $2.6 billion, respectively, at BofA–Merrill Lynch, and $9.8 billion and $2.5 billion at JPMorgan Chase & Co. Morgan Stanley, by contrast, had comparable revenues of just $2.3 billion and $1.6 billion.
“There is no question we took less risk in the first two quarters, but it would be a much more damaging position if we had lost money by taking excessive risk,” Gorman contends.
Elsewhere, Morgan has strengthened its balance sheet, cutting assets by 62 percent, to $677 billion at the end of June from $1.1 trillion a year ago, and selling $8 billion in equity and debt in May. It has also made strong league table gains, ranking second in global M&A, behind Goldman Sachs, in the first three quarters of this year — advising on $451 billion in deals, according to data provider Dealogic.
To steer the investment bank back to its former glory, however, Gorman will have to sustain improvement across the breadth of Morgan’s businesses. Robert Profusek, head of the mergers and acquisitions group at law firm Jones Day, says the turbulence in the financial world last year made people more accommodating. “[Gorman] is well regarded internally, hard-working but not overbearing,” Profusek says. “My sense is that people are taking a wait-and-see attitude.”
