Morgan Stanley Reports Loss, Hunts for Funding
Thursday, December 18, 2008
For 73 years, Morgan Stanley operated outside the bounds of traditional banking oversight. Its focus was investment banking -- the underwriting, trading and corporate dealmaking that defined the world of high finance and elevated it from the closely regulated, plain-vanilla business of lending money and holding deposits.
But in yet another example of how the credit crisis has turned the financial services industry on its head, Morgan Stanley is getting ready to join an already crowded field fighting for bank deposits from consumers and businesses.
It needs to move quickly. Morgan Stanley yesterday posted a $2.3 billion loss for the three months ended Nov. 30, its second loss in five quarters. In the comparable quarter last year, it reported a loss of $3.59 billion.
Revenue from the firm's advisory and underwriting businesses declined by about a third, and sharp declines in the value of leveraged loans, mortgage securities and other assets on the firm's books led to a fresh round of write-downs.
It's just that sort of trouble that has put Morgan Stanley on the prowl for relatively stable sources of funding such as bank deposits.
The hunt began in September, after the firm won approval from regulators to become a bank holding company. The new status gives Morgan Stanley access to an important lifeline from the Federal Reserve, which offers emergency credit to the banks it regulates. It also subjects the firm to intense scrutiny by bank examiners, who will insist that more capital be kept on reserve for each dollar put to work in the markets.
"It puts them under a lot more constraint," said Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics and a former Fed official. "Presumably it took a big swallow to do this."
Morgan Stanley has hired Cece Sutton, a 30-year veteran of Wachovia, to lead its charge into retail branch banking. She plans to build the business by acquiring regional banks, opening branches in key markets and offering new banking services to existing brokerage clients through the firm's 8,500 financial advisors.
Holly Sraeel, editorial director at USBanker, an industry publication, said creating a deposit-gathering operation will take time.
"It's not like inking an investment-banking deal, where things happen fast and furiously," Sraeel said. "This is a cross-your-t's-and-dot-your-i's type of business, and Cece's great at that, but that's not Morgan Stanley's culture."
Morgan Stanley has been arranging investment banking deals since 1935, when it was founded by Henry S. Morgan, a grandson of J. Pierpont Morgan, and Harold Stanley, another J.P. Morgan bank executive.
Morgan Stanley quickly cultivated a patrician mystique that was the envy of Wall Street. In the 1950s, the firm managed stock or bond offerings for U.S. Steel, IBM, General Motors and AT&T. In the 1960s, it opened a Paris office, planting the seed for an aggressive international expansion.
The blue-blood culture of Morgan Stanley got a jolt in the 1970s, when the firm began selling and trading securities to match rivals who were using their prowess in those areas to attract underwriting business. "The investment banks got to be more or less meritocracies, but because there is such a thing as a corporate memory, I think some of the old image carries on," said Richard Sylla, who teaches financial industry history at New York University's Stern School of Business.
It's unclear how the culture of Wall Street will adapt in the fold of federally regulated, deposit-gathering institutions. Shares of Morgan Stanley have fallen more than 39 percent since the firm won bank holding company status. The stock closed yesterday at $16.50, up 37 cents.