Gorman to Shrink Morgan Stanley’s Fixed-Income Business

Gorman Pledges to Shrink Morgan Stanley’s Fixed-Income Business
Fixed-income trading revenue at the five largest U.S. firms dropped 10 percent in the second quarter, excluding accounting adjustments, led by Morgan Stanley’s 60 percent plunge. Photographer: Scott Eells/Bloomberg

James Gorman vowed to shrink Morgan Stanley’s fixed-income division after that business posted the largest drop in revenue among Wall Street’s biggest banks.

So-called risk-weighted assets in the unit have already been cut 15 percent in the past nine months, Gorman, the firm’s 54-year-old chief executive officer, said on a conference call with analysts today. The reduction will reach 25 percent by the end of 2013, Gorman said, declining to provide the New York-based firm’s total risk-weighted assets, known as RWAs.

New rules from the Basel Committee on Banking Supervision are forcing Wall Street banks to increase capital for their trading businesses even as revenue falls. Fixed-income trading revenue at the five largest U.S. firms dropped 10 percent in the second quarter, excluding accounting adjustments, led by Morgan Stanley’s 60 percent plunge.

“There are certain businesses within fixed income that may be nice to have, but they’re not necessary and they are RWA-intensive,” Chief Financial Officer Ruth Porat, 54, said on the call. “As we reduce more complex areas, there’s not just a capital benefit, but there’s a funding benefit and an expense benefit as well.”

Structured credit and sub-investment-grade securitization are two areas that may be targets of asset reductions, Porat said.

Morgan Stanley has eliminated 3,272 jobs since the start of 2012 and expects that number to climb to 4,000 by year’s end, Porat said in an interview. She didn’t specify where the headcount reductions would be made.

Market Share

The asset cuts, which are targeted to climb to 30 percent by the end of 2014, may conflict with Gorman’s goal of increasing fixed-income trading market share to 8 percent, Mike Mayo, an analyst at CLSA Ltd., said on the conference call.

Colm Kelleher, 55, who oversees trading at Morgan Stanley, said in March that the firm made progress toward that goal last year, capturing more than 7 percent of the market, up from 5 percent in previous years. He said at the time that the fixed-income unit was “appropriately sized.”

Gorman said the cuts in RWAs so far have been largely from exiting large positions left over from the financial crisis, including restructuring a derivatives deal with the Italian government in January and reaching a settlement to cancel contracts with bond insurer MBIA Inc. in December. Further cuts will come from changes to the make-up of the firm’s fixed-income business, he said.

‘Balancing Act’

“It’s a balancing act here of not throwing the baby out with the bathwater,” Gorman said on the call. “We have some great businesses within fixed-income and we had obviously a very difficult quarter. We’re not going to hide from that.”

The institutional-securities division accounted for 52 percent of Morgan Stanley’s $42.5 billion in Tier 1 common capital in the second quarter, down from about 86 percent in the year-earlier period. Gorman said that percentage will continue to fall as the firm cuts back in fixed-income.

“As you squeeze down fixed-income you’re freeing capital, thus Morgan Stanley’s capital ratios look really good,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., said in a Bloomberg Television interview. “It then leads you to a question which will be, what are you going to do with this capital once you’ve correctly sized your business?”

(Corrects description of product unit that may be reduced in fifth paragraph of story published July 19.)
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