Ding dong, the witch is dead. Phil Purcell, the soon to be ex-CEO of white-shoe, blue-blooded (and red-in-the-face) Morgan Stanley has melted, and all will be right again. The stock will hit new highs, the munchkin employees (and Toto, too) will be paid enough to pave their own Yellow Brick Roads, the long list of departed trading and banking honchos will come flying back to Emerald City, saving the company from being sold on the cheap.
Uh, not so fast. If you believe that, I have a company named Sunbeam to sell you. It took $62.3 million, including $1.2 million a year for life, to get Mr. Purcell out, but Morgan Stanley is still Morgan Stanley: Profits are down 15% to 20% from a year ago; it owes $1.45 billion to Ronald Perelman for bad advice on Sunbeam grills and Coleman coolers; it got caught getting fees to stuff clients into mutual funds; the yield curve has flattened and small rooms filled with traders at hedge funds in Greenwich out-earn its football-field trading floors.
The next big equity issuance cycle is teed up for late 2006 (or so I believe). Morgan has lived with Dean Witter for all these years, why toss it now, when it can be a distribution channel for overpriced deals in 18 months?
How did this happen? It’s been said that Mr. Purcell was an absentee manager. I don’t know about that, but I did see him shank a tee shot toward the Pacific Ocean at a Pebble Beach Pro-Am. Nevertheless, the next CEO will have to be a wizard to get the firm out of the rough. Here’s a short list of where to begin:
• Culture. I spent five years of my life at Morgan Stanley, loving every minute of it. OK, not every minute. Morgan’s culture is sometimes known as Management by Fire. You got yelled at a lot. You were only as good as your last deal. I was paid well but, but like many other traders, planned my escape daily.
Back in March, Vikram Pandit and John Havens, a couple of big hitters who might now return, got up and walked out to a standing ovation. The email buzz from a few of my old Morgan pals wondered if traders were sad these two were leaving — or clapping because they were thrilled to see them go. The next offsite should cover anger management.
• Bankers’ liability. One of the most profitable businesses on Wall Street is investment banking, which is not terribly complicated. A few folks in gray flannel Armani suits help corporations tap the stock and bond market for expansion capital or to buy other companies whole, and charge exorbitant fees of tens of millions of dollars. Employees split half of the revenues, although some, like Mr. Purcell, got more than others. The rest pays for phone calls, lights, limos, Chateau Haut Brion, golf outings, self-purging email servers and, if there is anything left, profits to shareholders.
Then a jury in Florida went and awarded Mr. Perelman $1.45 billion for bad advice he received from Morgan Stanley. All of a sudden, this great business is a huge liability. Billions for bad advice . . . where do I note that on the balance sheet? Some missing emails annoyed the judge, who practically told the jury Morgan was guilty. My sense is the Perelman case will eventually be settled for much less, but still, is this a lucrative business anymore?
• Retail. Why did Morgan Stanley bother merging with Mr. Purcell’s Dean Witter in 1997 when electronic and Web trading were already so visible? Because it needed to compete for deals against Merrill Lynch, so why not, the thinking went, add a retail channel that it could then dump its, er, crappy deals on. And dump they did. Remember Drugstore.com? Ariba? Avanex? Homestore? To be fair, brokers are now less about churn and burn and have morphed into asset managers — kind of like personal shoppers at Nordstroms moving high-priced merchandise.
In normal times, it is terrible business. Offices in La Jolla are expensive! But I wouldn’t split off retail now. Didn’t they get the memo? The next big equity issuance cycle is teed up for late 2006 (or so I believe). Morgan has lived with Dean Witter for all these years, why toss it now, when it can be a distribution channel for overpriced deals in 18 months? Instead, make the bold move of changing brokers’ economics. Issue them with Blackberries and close all the offices — put padlocks on them. Tie compensation to each broker’s profitability. You’ll be surprised how fast these folks will save costs.
• Trading. The bankers create pieces of paper and traders shuffle them around for a commission — stocks, bonds, options, currencies, derivatives, pork bellies, NCAA tournament picks, whatever moves.
It used to be so easy. The Big Bang 30 years ago cut fixed-rate commissions from 75 cents a share to, well, if you can’t trade for less than a penny today, you’re getting ripped off. Electronic trading came of age in the 1990s for institutions as well as individual investors via Etrade, Fidelity and Schwab. A neutron bomb named Archipelago just hit the New York Stock Exchange. It’s hard to make money trading stocks and bonds for customers anymore.
No problem. Wall Street just concocts complicated pieces of paper — derivatives, which they sell as hedges for interest rates, currency, oil, weather and even against a drop in Sunbeam shares that Ronny Perelman forgot to buy. Profits are temporarily off, but the dirty little secret is that only the guy who creates the derivative really knows how to value it, and makes a fortune, kinda like printing money, trading it with hedge funds.
• Hedge funds. In fact, Morgan and Goldman and all the rest are giant hedge funds themselves, making money and taking positions against their customers. But lots of smart traders are leaving Wall Street and hanging out their own hedge-fund shingle. Why doesn’t Morgan Stanley just admit it’s in this business? Sure, long-term investors don’t like to pay for unpredictable earnings, but so what? Institutionalized, you could offer 20% of the upside to traders and the best and the brightest will line up around the block and beg to work for you. It beats raising money themselves.
Hostile takeovers, junk bonds, technology deals, brokers and even mutual funds were once disdained at highbrow Wall Street firms. Times change. So does how Wall Street gets paid and organizes. Phil Purcell’s leaving is the sign of more changes, not less. Get used to it, Dorothy — it’s not a bad dream.
Mr. Kessler is the author, most recently, of “How We Got Here: A Slightly Irreverent History of Technology and Markets” (HarperCollins, 2005).
Da un punto di vista storico, le scarpe con la suola rossa tutti i diritti e gli status symbol.
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