Morgan Stanley and the biggest U.S. banks should remain intact, Chairman and Chief Executive Officer James Gorman said, rejecting his predecessor’s assertion that the firm would be worth more broken up.
“This is a knee-jerk discussion that’s been going on,” Gorman, 53, said today in an interview with Erik Schatzker on Bloomberg’s “Market Makers” television program. “We need to just calm down, let this play out with the new regulation, the new capital rules, and at that point then figure out which businesses to accelerate, and which businesses to slow down.”
Former Morgan Stanley CEO Philip J. Purcell wrote in an opinion piece in yesterday’s Wall Street Journal that breaking up the banks would be better for shareholders. The stocks of five of the six biggest U.S. lenders --JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley -- are languishing at or below tangible book value.
That means the pieces are worth more than the whole, said Michael F. Price, who runs MFP Investors LLC in New York. The 2008 financial crisis and subsequent performance of the companies have called into question the universal bank model, in which lenders offer customers everything from checking accounts to derivatives trading.
Purcell led Dean Witter, Discover & Co. when it acquired Morgan Stanley in 1997 and ran the combined company, then the biggest U.S. securities firm, until 2005.
“The market is now discounting the stock prices of financial institutions with investment banking and trading,” Purcell wrote. “Breaking these companies into separate businesses would double to triple the shareholder value of each institution.”
Gorman, who said he hadn’t read Purcell’s column, called it an “ironic conclusion,” given Purcell’s role in constructing Morgan Stanley. The size of the large banks is driven by client demands for global service, Gorman said. Wells Fargo & Co., which is trading above book value, focuses on retail banking in the U.S. and is less reliant than its rivals on trading.
Marc Lasry, the billionaire co-founder of Avenue Capital Group LLC, said on Bloomberg Television that banks will have a difficult time making money in coming years and weak stock performance could lead boards to make changes. Davide Serra, the former head of European bank research at Morgan Stanley who is now managing partner at Algebris Investments, said on television that the universal bank model “has through time been the winning one.”
Morgan Stanley may earn 5 cents a share this quarter excluding accounting adjustments tied to debt as it faces “weaker trading volumes and significant client risk aversion,” Ed Najarian, an analyst at International Strategy & Investment Group Inc., said in a note yesterday. That’s down from 71 cents in the first quarter. Najarian rates Morgan Stanley hold.
Europe will progress toward solving its debt crisis and the U.S. economy will show more signs of growth before its presidential election in November, Gorman said. Employment in the U.S. will improve once companies gain more certainty about Europe, he said.
The Greek elections, support for Spanish banks and fiscal restructuring in other European nations show that the region is working “constructively” toward a solution, Gorman said. He disagreed with billionaire investor George Soros, who said June 24 that a failure by leaders meeting this week to produce drastic measures could destroy the currency.
“Working their way towards sharing that fiscal regime and at the same time necessarily giving up part of their sovereignty is an enormously taxing task,” Gorman said. “We shouldn’t presume it can be done over a Lehman weekend, which is what our sort of time frame is, and I just don’t think it’s helpful to use that kind of extravagant language.”
A trigger event similar to the 2008 bankruptcy of Lehman Brothers Holdings Inc. would be damaging and wouldn’t aid the political process of fixing Europe’s problems, Gorman said. Goldman Sachs President Gary D. Cohn said last week that European policy makers need a Lehman-like moment to spur action.
Morgan Stanley’s shares and debt rallied last week after its long-term senior unsecured credit rating was reduced two grades to Baa1 by Moody’s Investors Service, less than a threatened three-level cut.
Morgan Stanley avoided the biggest potential downgrade because of possible support from Mitsubishi UFJ Financial Group Inc., its largest shareholder, according to Moody’s. Gorman cited capital ratios in meetings with Moody’s to convince the ratings company that a three-level cut wasn’t deserved.
Mitsubishi UFJ invested about $9 billion in Morgan Stanley in 2008. The Japanese bank now owns 22 percent of the company, valued at about $5.9 billion, and about $500 million of preferred shares.