Monday, September 08, 2008

John Mack's Old & Tired Ideas For 'Refocusing" Morgan Stanley

The weekend edition of the Wall Street Journal carried an article describing John Mack's efforts to 'refocus' Morgan Stanley.

The lead sentence in the piece tells you the trouble Mack is courting,

"For two weeks in July, Morgan Stanley Chief Executive John Mack moved into an office near the research analysts who work at the Wall Street firm's headquarters in New York's Times Square. He had two goals: boost morale in a unit hit hard by layoffs and figure out how to squeeze more value out of stock research."

John, do you recall a guy named Elliot Spitzer? Do you remember what he charged many Wall Street firms with doing? Including your own, Morgan Stanley, regarding Mary Meeker?

As I recall, Spitzer reached a major, sector-changing settlement with your firm, and others, for ....squeezing more value out of stock research!

Mostly by improperly attaching it to trading and investment banking, so access to star analysts, and their involvement in boosting firms underwritten by their own firms, shifted their work from independent, objective research, to mere marketing on behalf of clients and trading desks.

A friend of mine, formerly a senior communications systems management at Lehman, now at a major tech firm, confirmed this for me last summer. He regaled me with stories of 'research analysts' getting in on the pitch to prospective underwriting clients on how they would support the new client via opinions to institutional clients and their own trading desks.

This is the sort of thing that the storied settlement was supposed to change.

Now, John Mack is reportedly,

"Since having dinner with research division leaders and informal chats with analysts as part of his two-week immersion, Mr. Mack has been talking with lieutenants about what should be changed in research. One challenge: quantifying the value generated by good ideas used by both the firm and its clients. The topic has come up several times at recent weekly management-committee meetings."

First, isn't that the holy grail of Wall Street? And has been since time immemorial? Please tell me, John, that you don't really think this is new ground you are plowing.

"Quantifying the value...." of research is the age old quest of brokerages trying to figure out what those expensive eggheads actually do to make money for the firm.

And, since the modern brokerage has three major businesses- institutional sales/trading, proprietary trading and underwriting- the analyst must be adding value to one or more of these, if s/he adding value at all.

The first and third businesses are exactly where Spitzer's hunt focused- improper use of analysts to win underwriting and then lever those products into institutional trading clients.

Using analysts to improve proprietary trading is, of course, an obvious path. But if this were simple and effective, wouldn't it already have been done? Then, again, the really good analysts, eventually, become money managers. So maybe that's not as simple as it seems. And it puts great pressure on analysts to produce consistently and well. Maybe that, too, doesn't work so well in practice as in theory.

It just strikes me, from the Journal article, that none of Mack's alleged new ideas is actually new at all. And if they are known to work, wouldn't the article note that, too?
As the nearby five year price chart for Morgan Stanley and the S&P500 Index indicates, it's been a terrible 18 months or so for Mack and his battered shareholders.

It seems to be another stumble of John Mack's on the long journey through the desert of bad performance on which he has led Morgan Stanley these past few years.

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