The Economist Asia - 27.01.2018

The EconomistJanuary 27th 2018 59

For daily analysis and debate on economics, visit

Economist.com/economics

1

M

ORGAN STANLEY emerged in 1935

out of a global financial disaster, as

one of Wall Street’s leading firms. In a rare

shred of consistencyin America’s turbu-

lent markets, history has repeated itself.

But it was a close call. An ill-timed infatua-

tion with debt ahead of the 2007-08 finan-

cial crisis threatened to add it to the indus-

try’s towering funeral pyre, which

consumed all its big competitors with the

exception of Goldman Sachs.

Of the two, Morgan Stanley came out of

the crisisthe more tarnished, less for what

it did than for what it was: less profitable;

less connected, through its former employ-

ees, to political power; and less respected

for having evaded disaster. But after the re-

lease of financial results from the fourth

quarter of 2017, Morgan Stanley’s valuation

has surpassed Goldman Sachs’s. This re-

flects not only the improvement in its prof-

itability but also investors’ greater confi-

dence in how it is managed.

Goldman, with some justice, finds the

comparison unfair. The two firms make

roughly equivalent returns and each is top

dog in global league tables for segments of

the capital markets. Goldman might easily

reclaim its edge in the next quarter. But its

approach has a growing legion of doub-

ters. Fixed-income, currencies and com-

modities, the mysterious profit centre from

which its chief executive, Lloyd Blankfein,

graduated, has had a rough stretch that re-

Since the financial crisis, Morgan Stan-

ley’s results have improved steadily, albeit

only to their current level of barely ade-

quate. Its return on equity in the recently

completed year (adjusting for the oddities

of America’s recent tax reform) is 9.4%, not

quite up to that of a run-of-the-mill utility.

Mr Gorman’s new targets are for 10-13%,

somewhat closer to the overall market av-

erage. On a recent conference call a finan-

cial analyst asked him why the target was

not higher. After all, Morgan Stanley will

enjoy a big boost from the tax overhaul,

which will cut its tax rate from over 30% to

the mid-20s. Mr Gorman demurred, stress-

ing that the firm would only project returns

it felt were feasible even if conditions be-

come rough. To aim higher—and in particu-

lar to replicate the pre-crisisreturns on equ-

ity of more than 20%—would mean “doing

something you don’t want us to do”.

Some of this coyness stems from Wall

Street’s new arithmetic. Since 2006, Mor-

gan Stanley’s capital has grown from $35bn

to $77bn and it has slashed its debt: that has

eaten into returns on equity. Capital re-

quirements may fall a bit as regulatory

models are tweaked (see Free exchange)—

Morgan Stanley has been especially affect-

ed by some of their quirks—but the permis-

sive mood of the past is unlikely soon to re-

turn. Often, when a chief executive

explains barriers to profitability, a com-

pany’s share price sinks. Mr Gorman’s

comments had the opposite effect. Sobri-

ety is in vogue.

Underlying the results are large changes

to the firm. Its hallwaysstill buzz with slim,

well-dressed, intense people of indetermi-

nate age. But they are not quite the self-

anointed mastersof the universe of the

pre-crisis era. Pay as a share of investment-

banking revenues has dropped from a

peak of 78% in 2008 to 35% (see chart). In-

flects more than bad luck. Its newest

growth initiative—to profit from small cli-

ents it ignored in the past—has yet to prove

itself more than an interesting idea.

The rising esteem for Morgan Stanley

came grudgingly at first, and then fast. The

firm and its chief executive, James Gor-

man, are seen ashaving attributes com-

mon in many businesses but oddly rare on

Wall Street: a long-term vision; a plan to ex-

ecute it; and a record of bringing it to life.

All the more unusual, these attributes omit

the defining trait of the historically success-

ful investment bank—wild, euphoric, glori-

ous years of profit (often then paid out to

staff and lost in subsequent busts).

Morgan Stanley

Tediously does it

NEW YORK

The recovery of Morgan Stanley is a huge achievement with, so far, modest results

Finance and economics

Also in this section

60 Buttonwood: Volatility’s eerie calm

61 Microfinance and disaster relief

61 Europe’s direct-lending funds

62 Nigeria’s central-banker shortage

63 Poverty and migration

63 Hyperinflation in Venezuela

64 Free exchange: Bank regulation

Those were the days

Sources: Morgan Stanley; Bloomberg

Morgan Stanley

0

20

40

60

80

100

0

10

20

30

40

50

2007 09 11 13 15 17

Compensation as

% of investment-

banking revenue

Wealth-management

revenue as % of total

РЕЛИЗ

ГРУППЫ

"What's

News"