Mack Steps Down as Morgan Stanley Chief After Shying From Risk : By Christine Harper
Sept. 11 (Bloomberg) -- John Mack, who struggled to return Morgan Stanley to profitability after surviving the worst financial crisis since the Great Depression, will turn over his chief executive officer title to Co-President James Gorman.
Mack, 64, will step down at the end of the year and remain chairman of the New York-based bank for at least two years, he said in an interview yesterday. Gorman, 51, will become CEO and Walid Chammah, 55, co-president with Gorman since 2007, will relinquish that role and remain chairman of Morgan Stanley International in London. The changes take effect Jan. 1.
In more than four years leading the firm, Mack sought to improve profits and repair divisions that appeared under former CEO Philip Purcell. Mack’s strategy of boosting trading risks backfired in 2007 when bad bets led to the firm’s first quarterly loss. While the company survived the financial crisis that devastated some rivals, Morgan Stanley has lost money since the third quarter of 2008 and reined in trading even as Goldman Sachs Group Inc. earnings hit an all-time high.
“Mack has been beaten up a little for not taking as much risk in the capital markets as Goldman,” said Matt McCormick, a banking industry analyst at Bahl & Gaynor Inc. in Cincinnati, which manages $2.3 billion. “He was given a tough job, I think he handled it above average and history will judge him a solid leader on Wall Street.”
Morgan Stanley slashed the assets on its balance sheet by almost a third to $677 billion at the end of June from $987 billion at the end of August to cut its reliance on leverage, or borrowed money. The firm’s average value-at-risk, a measure of how much the company estimates it might lose in a day’s trading, was $154 million in the second quarter compared with $245 million at Goldman Sachs.
Missed Opportunities
Led by Chief Executive Officer Lloyd Blankfein, Goldman Sachs set a new Wall Street record for fixed-income and equities trading revenue during the second quarter. Colm Kelleher, Morgan Stanley’s chief financial officer, said in July that the firm’s fixed-income team “didn’t pursue the opportunities we could have” in the second quarter.
Gorman, born in Australia, was recruited by Mack in August 2005, less than two months after Mack became CEO, to run the retail brokerage division. Gorman previously worked at Merrill Lynch & Co., now part of Bank of America Corp., which is Morgan Stanley’s biggest competitor in providing financial advice to individual investors.
Earlier this year, Gorman increased Morgan Stanley’s investment in its brokerage business when he formed a joint venture with Citigroup Inc.’s Smith Barney. Morgan Stanley paid $2.75 billion in cash to Citigroup to gain a 51 percent stake in the venture, dubbed Morgan Stanley Smith Barney, which had 18,444 financial advisers as of June 30.
Share Decline
Gorman said in an interview that he doesn’t expect to change Morgan Stanley’s strategy.
“We’re pretty clear about what kind of company we’re going to be,” Gorman said yesterday. “A lot of what has to happen now is to really focus on day-to-day execution.”
Morgan Stanley in July reported its third consecutive quarterly loss, weighed down by accounting charges and costs as well as fixed-income trading and asset-management revenue that Mack said was unsatisfactory.
The company’s stock, at $28.64 in New York Stock Exchange trading yesterday, is down 34 percent from its closing level on June 30, 2005, the day Mack was named chairman and CEO. Goldman Sachs shares are up 71 percent and JPMorgan Chase & Co. shares climbed 22 percent over the same period.
“Mack is a bigger-than-life individual” who has had both negative and positive effects on the firm, said Brad Hintz, an analyst at Sanford C. Bernstein & Co. and a former treasurer at Morgan Stanley. “Mack’s leadership stabilized the firm after Purcell left and he pulled the firm back from failure in 2008.”
‘My DNA’
Mack’s decision to step down was unrelated to the firm’s recent performance or the stress of last year’s financial crisis, Mack said. He said he told the board 18 months ago that he would like to hand off the CEO title after he turns 65 in November.
“I’ll stay as chairman at least for two years working with James, working with clients,” Mack said. “I’m not leaving this firm. This firm is part of my DNA.”
Mack spent most of his career at Morgan Stanley, working his way up in fixed-income sales and trading before becoming president under CEO Richard Fisher in 1993. He encouraged Fisher to sell the firm to Dean Witter Discover & Co., the brokerage firm led by Purcell, only to leave in 2001 after Purcell refused to relinquish power.
McKinsey Man
He helped run Zurich-based Credit Suisse Group AG for three years, leaving after a clash with the board. When Morgan Stanley shareholders and employees helped to oust Purcell in 2005, fed up with a lackluster share price and an autocratic management style, they turned to Mack to restore the firm’s former glory in investment banking and trading.
Like Purcell, Gorman worked at consulting firm McKinsey & Co. before running a retail-oriented financial brokerage and has never worked as a trader or banker. That’s led some analysts to question whether he’ll have the same difficulty winning over the institutional-securities side of the business as Purcell did.
“I am concerned that the Morgan Stanley board of directors is placing an admittedly capable executive with a largely retail brokerage operating background in charge of a global capital markets firm with the second-largest investment banking franchise in the world,” Bernstein’s Hintz said. “It was a similar decision in 1997 that led to the lost decade of Morgan Stanley.”
‘On My Screen’
Mack dismissed the concerns, saying that Gorman is much more accessible to bankers and willing to make client calls than Purcell was. Gorman said that a majority of his recent client meetings have been with customers of the institutional- securities side of the business.
Mack said he considers his own greatest accomplishment to be leading the firm through last year’s crisis, which wiped out Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch. One week after Lehman’s Sept. 15 bankruptcy, Morgan Stanley and Goldman Sachs converted to bank holding companies, ending their history as independent securities firms to win the backing of the Federal Reserve.
Morgan Stanley shares fell as low as $9.68 on Oct. 10 before the firm won a $9 billion investment from Japan’s Mitsubishi UFJ Financial Group Inc. and $10 billion from the U.S. government on Oct. 13. Mack has since repaid the Treasury and the stock has rebounded. Spreads on the company’s bonds, which widened during the financial crisis, have since narrowed to bring them in line with peers.
“You’ve got to give him some credit for surviving,” said Kenneth Crawford, a senior money manager at Argent Capital Management LLC in St. Louis, which oversees $700 million. “The good thing is there’s an MS ticker on my screen that changes price each day, and there are a fair number of his peers that aren’t on my screen anymore.” (News Courtesy By bloomberg.com)
