Morgan Stanley Can’t Cut Its Way to Growth

by Dan Burrows | January 17, 2013 1:20 pm

It seems greed is no longer good on Wall Street. Indeed, legions of folks who thought they’d strike it rich as investment bankers at the top-tier firms are taking pay cuts or getting pink slips.

The situation is particularly gruesome at white-shoe Morgan Stanley (NYSE:MS[1]), which earlier this week said it would slash another 1,600 employees, or 3% of its workforce, in the coming months.

The No. 2 Wall Street titan after Goldman Sachs (NYSE:GS[2]) also said it’s deferring bonuses for all of its “top earners,” or anyone making more than $350,000 in salary and more than $50,000 in bonus over a three-year period.

And all that bad news for Morgan Stanley’s would-be Masters of the Universe comes before the bank reports earnings Friday. Although MS is forecast to swing to a quarterly profit from a year-ago loss, for the full fiscal year it’s likely to turn 2011’s black ink into red — another grim reminder of what an annus horribilus it’s been

It turns out that the long-anticipated but never-realized pickup in trading and deal activity has forced the big investment banks’ hands on staffing levels and compensation.

Initial public offerings are almost nonexistent, there’s a paucity of mergers and acquisitions, capital markets are desultory and equity trading volume is at 14-year lows, at least on the New York Stock Exchange. Meanwhile, new regulations curbing everything from leverage to in-house hedge fund operations and private equity shops make the days of sizzling revenue growth long gone.

Heck, even Goldman Sachs, Wall Street’s most powerful investment bank, is slashing jobs and pay packages — and it’s doing so as profits soar.

But bad news for investments bankers is good news for shareholders, if only because more of the revenue generated will find its way to the bottom line, rather than bankers’ pockets.

And shareholders in Morgan Stanley sure could use it. Yes, the stock is up 26% in the last 52 weeks, beating the broader market by about 12 percentage points.

But at what opportunity cost? Investors in Morgan Stanley would have done so much better betting on shares elsewhere in the sector. Goldman Sachs has gained 44% over the last year, clobbering Morgan Stanley by 18 percentage points.

Even the big, blundering money-center banks have absolutely crushed it. Bank of America (NYSE:BAC[3]) is up 76% over the last 52 weeks. Citigroup (NYSE:C[4]), which shot its CEO out of a cannon last year, has gained 45% since this time last year.

Or take JPMorgan Chase (NSYE:JPM[5]). It survived a whopper of stupidity — the London Whale trading fiasco — to put up a price increase of 33% over the last 52 weeks.

As we’ve noted before, Goldman Sachs’ money-minting days are over[6]. That goes double for Morgan Stanley. Not only does the bank face the same secular slowdown in the investing banking business as Goldman Sachs, but it has a lower credit rating, meaning its cost of capital is higher.

Plus, its reputation is still smarting from its botched handling of the Facebook (NASDAQ:FB[7]) IPO last year — and its big plan for boosting profitability and share price is to slash jobs and defer compensation.

If financials have another good year — as they did last year — Morgan Stanley will no doubt go along for the ride, especially given its capital plans[8]. But don’t be surprised if it’s the big laggard compared with peers once again.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. MS:
  2. GS:
  3. BAC:
  4. C:
  5. JPM:
  6. Goldman Sachs’ money-minting days are over:
  7. FB:
  8. especially given its capital plans:

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