A big Wall Street bank is wrestling with investor concerns, a disappointing earnings result, and regulatory headaches.
It’s not just Goldman Sachs (GS) that fits this description. It’s also Morgan Stanley (MS).
For much of this year Goldman was the big Wall Street bank in the hot seat as it dealt with a costly retreat from consumer banking, a dealmaking slump, job cuts, reports of partner unrest, and even questions about the future of CEO David Solomon.
But now crosstown New York City rival Morgan Stanley is also under rising scrutiny as it prepares to hand over the corner office to Ted Pick, who will replace James Gorman as CEO on Jan. 1.
The stock of Morgan Stanley is down 14% over the last three months and 8.5% over the last six months, more than any other big bank with a sizable Wall Street operation.
Goldman, by comparison, is down roughly 4.5% for the last three months and up nearly 2% for the last six.
Morgan Stanley’s largest single-day stock drop in more than three years (7%) came in October as it disclosed that investment banking and trading fell in the third quarter. All of Wall Street had been struggling with a prolonged dealmaking downturn, but Morgan Stanley’s 27% decline in investment banking revenue placed it last among the big banks.
Regulatory issues are also beginning to pile up at the firm. One such headache is a yearslong federal investigation into how it handled so-called block trades, or private sales of stock.
Semafor reported that the firm could end up paying between $500 million and $1 billion to settle the block trading probes by the Justice Department and Securities and Exchange Commission, while also agreeing to improve internal controls.
Morgan Stanley is also reportedly trying to address concerns from the Federal Reserve, its primary regulator, about foreign wealth management clients.
The Fed wants to know whether Morgan Stanley has the proper controls to ensure those clients aren’t laundering money, according to a report last week in the Wall Street Journal. The firm is trying to convince the Fed that any weaknesses have been rectified, according to the Journal.
Morgan Stanley declined to comment.
A ‘tone change’
There is one view inside the firm that Morgan Stanley’s stock price will rise once the block trading probes are settled. And that firm outperforms the majority of rivals in other important measures — such as price-to-tangible book value, price-to-earnings ratio, and total amount of tangible common equity.
Wells Fargo banking analyst Mike Mayo, however, said Morgan Stanley’s stock still faces headwinds on several fronts because investors have concerns.
These questions, according to Mayo, range from the firm’s regulatory inquiries to certain business fundamentals (growth in its wealth management unit slowed in the third quarter while investment banking revenue slipped) to governance risks associated with bonuses recently awarded to top executives.
Mayo pointed to a recent disclosure following Pick’s CEO announcement showing the new boss had been awarded a special share-based bonus of $20 million.
The two other frontrunners for the job — Andy Saperstein and Dan Simkowitz, now both co-presidents — were also given the same award.
“Isn’t it enough to get a higher bonus for being CEO and running one of the largest investment banks in the world?” Mayo said. “Do they really need a retention bonus on top of that? I struggle to find a precedent for that unless there’s some unusual flight risk.”
The transition to Pick from Gorman ends the tenure of one of the longest-serving CEOs on Wall Street. Gorman took over in 2010 when the firm faced serious questions about its survival in the aftermath of the 2008 financial crisis.
Gorman led an aggressive push into wealth management as a way of smoothing out the volatility from trading and investment banking, purchasing ETrade and Eaton Vance and absorbing Smith Barney.
The strategy worked. Morgan Stanley was “in the right place at the right time with the right concepts,” Odeon Capital bank analyst Dick Bove told Yahoo Finance.
Since Gorman became CEO Morgan Stanley’s stock has climbed 154%, outperforming all its peers outside of JPMorgan Chase (JPM).
“I think the selection of Ted Pick was exactly right because this company has got to adjust its direction dramatically,” Bove added, pointing to his anticipation that dealmaking will lead Wall Street profits going forward.
Gorman also told analysts last month that he expects more dealmaking activity to materialize in 2024. When the Fed decides it has stopped raising interest rates, “the M&A and underwriting calendar will explode because there is enormous pent-up activity.”
“Unfortunately,” he added, “I’m not going to be around to enjoy it.”
Mayo also acknowledged Morgan Stanley’s “run of success” since a decade ago, which he attributed to both Gorman’s leadership and Pick’s turnaround within the fixed-income trading division.
“I just sense a degree of overconfidence in the recent [earnings] calls,” he said.
“It’s a tone change. And I’ll tell you this tone change is night and day from a decade ago.”
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