What the future holds for Mack’s Morgan Stanley
Swingeing change is likely at Morgan Stanley under its new chairman and CEO John Mack as he attempts to integrate the cultures of its many parts.
John Mack is in listening mode. That is what Morgan Stanley employees were told when the new chairman and CEO of the firm visited London. They had better believe it. No-one else does. Sources elsewhere in the City of London and Wall Street expect swift change across the business.
Morgan Stanley’s retail business, the former Dean Witter operation, will get most attention. Mr Mack was an architect of its merger with Morgan Stanley but he has made no secret of his dissatisfaction at the way former CEO Phil Purcell failed to manage the cultural conflicts between the brokerage and the blue-blooded Wall Street firm.
Sell-offs mooted
The sale of Dean Witter has been mooted and in some quarters strongly promoted. But would cutting loose such a large part of the operation appeal to a man who wants to build Wall Street’s greatest empire rather than shrink it? A more likely response to the retail sector’s problems could be a thorough management reshuffle.
The sale of the credit card group, Discover Financial Services, is also under active consideration, according to sources. Mr Purcell had announced plans to offload it shortly before he was forced to resign. But this was seen as a way of placating shareholders who were disillusioned by Discover’s performance, rather than a move driven by a strategic plan. Wall Street sentiment has now swung against the offloading of Discover because it provides reliable cashflow to offset against the bank’s lumpy investment banking revenues. Swingeing management change again looks a more viable option than wholesale dislodgement.
Where Mr Mack might take swift and decisive action, something for which he is famous, is in his dealings with Morgan Stanley’s $818bn asset management business. One source close to the company asked rhetorically: “Can an asset management business co-exist within a diversified retail business?”
Regulators are known to be putting pressure on banks to resolve the conflicts of interest that beset a manufacturer of a mutual fund who sells its own mutual fund products into its asset management portfolio. So Morgan Stanley may decide to remove itself from the asset management business and free up executive time for pure banking.
If this were the case, Morgan Stanley would be doing no more than following Citigroup’s lead. The bank recently offloaded its $437bn asset portfolio to Legg Mason in return for Legg Mason’s private client and capital markets businesses, together with a cash payment.
In whatever way Mr Mack decides to resolve these issues, he will take care to ensure his actions are decisive, clear-cut and unambiguously communicated. This will set him apart from his predecessor, who observers say lacked the capacity to communicate decisions to employees. One analyst noted: “Purcell is an academic man, who prefers living in his ivory tower to mixing it with the troops. Mack is much more out of the mould of Goldman Sachs’ Hank Poulson or Merrill’s Stan O’Neal. He is a man that never ceases to be active.”
The Mack culture
The culture of hard-sell and drive will percolate through the organisation from the top down, says Dick Bové, an analyst at Punk Ziegel: “Mack will permeate the firm with a culture of meritocracy and that will be positive. There will be no place at Morgan Stanley for those that do not produce.”
Mr Mack’s appointment is certain to have one beneficial effect. It will stop the rot of defections and disaffection that have been rocking the firm and precipitate new activity and enthusiasm. “The bank will get back to business,” says Bob Lovejoy, a managing director at Ripplewood Holdings, a Wall Street private equity firm. “They have had their fun but now that will have to stop and they will start to focus again on the market out there.”
Up against the board
Mr Mack will need all his crisp thinking and capacity for tough action to neutralise the board of directors, which is composed of the great and good of the world’s financial industry, who have angered shareholders by granting guaranteed remuneration packages to members of the bank’s old guard. This means that Phil Purcell, the former chairman and CEO, can receive $113m, that Stephen Crawford, the former co-president and head of risk management, can receive $32m, and that David Sitwell, the former chief financial officer, will receive $10.5m.
The deals caused controversy just as Mr Mack was getting his feet under the table. In recognition of the damage the payments are doing to internal morale, Mr Mack has agreed to forgo his own guaranteed package of $25m.
Market outrage
The market is outraged by the size of the packages, says Mr Bové. “If one has the impression that the board of directors is now raiding shareholder funds to give money to its own [people], one might not be far off [the truth]... So much for believing that the actions of the Securities Exchange Commission or the New York State’s attorney general had any lasting impact on corporate governance.”
The board’s performance clearly makes its members a suitable target for the man routinely dubbed Mack the Knife. But Morgan Stanley’s constitution prevents their removal before the annual meeting of the company next January. Patience is not one of the attributes for which Mr Mack is noted and he might find the wait hard to bear.
