Morgan Stanley’s Pristine Heritage
“At all times, the idea of doing only first class business, and that in a first class way, has been before our minds.” J. P. Morgan Junior read into the record at a U.S. Senate hearing.
In response to a question at the Pujo hearings in 1912, J. P Morgan said “ No, Sir. The first thing is character.”
Morgan went on to say: “Before money or anything else. Money cannot buy it… Because a man I do not trust could get money from me on all the bonds in Christendom.”
The Essence of Blue Blood and Money
Ms. Beard described the selfless fight of eight advisory directors (retired Managing Directors) of Morgan Stanley to replace Philip Purcell as CEO of Morgan Stanley because of their convictions that under his aegis the culture of Morgan Stanley was becoming fatally undermined. Having been a managing director of Morgan Stanley, I know and have admired these eight men and applauded their successful efforts to unseat Purcell. Unfortunately, Ms. Beard needs to add another chapter to her book describing the recent carnage of Morgan Stanley’s financial results. In essence, John Mack needs to share authority with a executive who has high intelligence to complement his charismatic skills.
The Plans of Mice and Men oft go Astray
“Great firms get through tough times and we are a great firm” John Mack, 11/26/07
December 19, 2007 Morgan Stanley takes $9.4 Billion dollar write down and gets $5 Billion cash infusion from Chinese Bank. The write-down was the first quarterly loss in Morgan Stanley’s 73 year old history.
December 24, 2007 Goldman Sachs announces record fiscal earnings
John Mack’s Failures
Unfortunately, despite a sincere desire to reestablish the preeminence of the “blue blood” legacy of Morgan Stanley, the current CEO John Mack has made several costly mistakes that have cost Morgan Stanley billions of dollars. His failure to recruit the best trading and asset management talent, has led to a precipitous decline of the stock price. Specifically, John Mack’s failures to recruit back Vikram Pandit, the current CEO of Citicorp, and his failure to purchase BlackRock have been monumental errors. That is, Mr. Mack decided to keep Zoe Cruz as President, and thus effectively impeded key former executives from Morgan Stanley from returning to The Firm. Moreover, Mr. Mack’s failure to purchase BlackRock, not only led to Morgan Stanley’s missing the monumental price increase of this prestigious asset manager, but also a failure to recruit talented executives like Larry Fink the premier investment banker in assessing asset-backed securities. Stated differently, Citicorp recruited and elevated Vikram Pandit because of his investing savvy and administrative skills. Because Blackrock has the finest fixed income team in the world, it has been hired to advise diverse institutions such as the State of Florida and the Federal Deposit Insurance Corporation to understand the nuances of the mortgage market. BlackRock has become one of the world’s leading asset managers with trillions of dollars under management. In essence, Mr. Mack’s chose the wrong fork in the road when he passed upon his opportunity to recruit back Mr. Pandit and to purchase BlackRock. These failures led to critical failures in attaining the talent necessary to avoid the current financial crisis. The precipitous firing of Zoe Cruz and the demoting of other senior trading executives was a belated recognition on Mr. Mack’s part that he had fielded and promoted the wrong risk managers in today’s turbulent market. Stated differently, the “eight grumpy old men” had no input in the selection of Purcell’s replacement as CEO. Could Larry Fink, Vikram Pandit, or Bob Scott helped John Mack avoid the catastrophic financial pitfalls? I believe that they could have made a major difference.
Why did these 8 Advisory Directors sacrifice millions of dollars to restore Morgan Stanley’s image?
The eight “grumpy” old men who led the successful Don Quixote charge against the seemingly impenetrable Philip Purcell recognized that there was a dilution of the Morgan Stanley culture because of the 1997 merger with the Dean Witter organization. This problem was compounded by the elevation of Philip Purcell to become CEO of the combined Dean Witter Morgan Stanley. Mr. Purcell represented the worst elements of today’s executive culture. That is, he did not tolerate legitimate dialogue, he maintained at Morgan Stanley’s expense a luxurious personal lifestyle including the use of three corporate jets, he discouraged teamwork, he promoted mediocrity, he failed to court key global clients throughout the world, he failed to develop and promote talented investment bankers and risk managers, and ultimately demanded hundreds of millions of dollars for he has his cronies to leave a ship that he had personally scuttled. In a nutshell, he was so disdainful of the wonderful attributes of Morgan Stanley that his executive actions led to a precipitous decline in the firm’s prestige and return on capital. The failure of every member of the Board of Directors of Morgan Stanley to attend the funeral of Richard Fisher, the former Chairman of Morgan Stanley, was an affront not only to Mr. Fisher’s great contribution to Morgan Stanley, but to the firm’s entire cultural history.
Current Problems Plague Morgan Stanley
Unfortunately, while their motives were unimpeachable, the eight men’s fight to save the culture of Morgan Stanley remains an uphill battle. That is, while John Mack tried to catch up with his competitors by purchasing hedge funds, spending billions on private equity investments, and purchasing several hedge funds, the combination of his own mistakes and the carnage of the eight year reign of Purcell remain daunting legacies. To what extent, Purcell’s vetoing of Bob Scott as his replacement added to his terrible legacy. That is, Bob Scott is a brilliant executive who had widespread experience in every facet of Morgan Stanley’s business. Although Bob Scott suffered a near fatal heart attack, he could have fulfilled many useful functions for Morgan Stanley. That is, the failure of John Mack to place Mr. Scott in a similar position to the role of Robert Rubin at Citicorp seems disloyal given the enormous financial and personal sacrifices made by Mr. Scott in unseating Purcell.
Credibility Gap: “You cannot fool all the people, all the time.”—A. Lincoln
While we all are captivated by John Mack’s charismatic presence, the incredulity of major financial analysts that follow Morgan Stanley must also be stressed. That is, several analysts questioned Mack’s comments that the enormous loss was attributable to “one rogue trading desk.” At a minimum, Morgan Stanley has a woefully deficient system for monitoring and preventing financial catastrophes. Thus, going forward, Mack must reduce risk precipitously until he gets a better team of traders in place and establishes a first rate financial monitoring capability. The combination of the stupendous loss plus the failure to capture accurately Morgan Stanley’s financial picture left analysts most skeptical.
Originally published in the Sarasota Herald-Tribune
