Morgan Stanley’s Kelleher Faces Profit Task Solo as Taubman Goes
Colm Kelleher, who will take over as sole head of Morgan Stanley’s (MS) investment bank as his counterpart and past rival Paul J. Taubman exits, now faces the challenge of improving returns at the firm’s biggest business.
Taubman will retire at the end of the year, the New York- based bank said yesterday in a statement. The move concludes an almost three-year dual-leadership role marked by enmity between Kelleher, 55, a gregarious former fixed-income salesman, and Taubman, 51, a reserved investment banker.
Chief Executive Officer James Gorman is relying on Kelleher to help improve earnings as the stock has traded below book value for most of Gorman’s tenure. Morgan Stanley’s investment bank has posted a return on equity, a measure of profitability, of less than 4 percent in the first nine months of the year, trailing competitor JPMorgan Chase & Co. (JPM)’s 17 percent. In 2006, ROE at Morgan Stanley’s investment bank was 30 percent.
“We must continue our intense focus on improving ROE,” Gorman, 54, said in an internal memo obtained by Bloomberg News. “Aligning sales trading more closely with investment banking and capital markets will allow us to explore and extract new revenue opportunities within institutional securities and better manage our costs.”
Kelleher and Taubman disagreed over how aggressively to push clients for additional business on the back of capital- markets deals, three former colleagues told Bloomberg News in 2011. Gorman, who met with the executives last year to settle tensions, recently decided that the division would win more of those deals with Kelleher running the entire unit, a person briefed on the decision said.
While Kelleher won out over Taubman, he may face more obstacles in seeking to persuade bankers to push more products.
“I understand the motivation of a head of trading to encourage investment bankers to attempt to use their contacts with corporate treasurers to originate trades and hedging,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. and a former Morgan Stanley treasurer, said in an e-mail. “But if faced with the tradeoff between asking for an M&A engagement and a swap, the M&A pitch will win every time.”
Investment banks sometimes pitch clients to win derivatives business related to a stock or bond sale, such as an interest- rate or currency swap. While the secondary deal can boost trading revenue, it can also make the bank a counterparty to a client it had just advised.
With Kelleher looking to secure more deals to increase trading revenue and Taubman seeking to avoid alienating clients, Morgan Stanley, the sixth-largest U.S. bank by assets, has lagged behind rivals, the former colleagues said last year.
The interaction between trading and banking may become more of a focus as Morgan Stanley and competitors seek to produce more revenue with fewer people and using less capital. The firm has said it intends to pare 4,000 positions this year through job cuts and unit sales. In September, Chief Financial Officer Ruth Porat laid out a plan to reduce the fixed-income trading unit’s risk-weighted assets under Basel III rules by at least 35 percent from the third quarter of 2011 through the end of 2014.
One area of collaboration will be corporate lending, which is likely to expand once Morgan Stanley purchases Citigroup Inc.’s remaining stake in a brokerage joint venture and gains control of more than $50 billion in deposits.
Investors may struggle to gauge progress as firms don’t disclose the amount of trading revenue derived from investment- banking relationships. Goldman Sachs Group Inc. (GS) sought to demonstrate its success on that front in its 2009 annual report, telling shareholders that revenue in “risk- management solutions” offered to investment-banking clients climbed 32 percent annually from 2005 through 2009.
“Our advisory business serves as our primary point of contact with our clients and is often the genesis for sourcing other opportunities to serve them,” Goldman Sachs CEO Lloyd C. Blankfein, 58, wrote in the report.
Gorman told both men about the decision more than a week ago and the announcement was delayed because of Hurricane Sandy, according to the person who was briefed.
After being informed of Gorman’s decision to have Kelleher take over as sole head, Taubman decided to retire from the firm, according to the person, who declined to be identified because the discussions were private. The pair have been seen by colleagues as potential successors to the CEO. Taubman didn’t return a phone call seeking comment.
“It’s unfortunate that Morgan Stanley couldn’t derive the benefits of the collective talent of Colm and Paul,” said Jay Dweck, 57, who led Morgan Stanley’s strats and modeling group until 2011. “Paul brought an enlightened client-focused view to the institutional-sales division, which will be sorely missed.”
Mark Eichorn and Franck Petitgas were named global co-heads of investment banking, the area that Taubman oversaw, the firm said in yesterday’s statement. The pair will report to Kelleher, who has overseen trading.
While Kelleher ran the larger trading businesses, the investment-banking unit that Taubman led performed better. Morgan Stanley ranked fourth in investment-banking revenue among its largest global rivals in the first nine months of this year, the same place it held in 2011 and 2010, according to data compiled by Bloomberg. The firm is seventh in trading revenue this year, compared with sixth in 2011 and eighth in 2010.
Morgan Stanley ranks second among advisers on global mergers and acquisitions so far this year and first among managers of global equity issues, the data show. Both of those businesses were under Taubman’s leadership. The firm, which has 57,726 employees, has also faced investor complaints over its handling of Facebook Inc. (FB)’s initial public offering in May, after shares of the social-network operator slid.
Kelleher, who was the firm’s CFO during the financial crisis, has worked in the investment-banking and trading divisions during more than 20 years at Morgan Stanley. Taubman has only been an investment banker since joining the company in 1982.
Kelleher had made progress in reaching Gorman’s goal of an 8 percent market share for Morgan Stanley’s fixed-income unit. The firm had a 7 percent share last year, up from as low as 5 percent in previous years, Kelleher said in March.
That progress slowed this year as the bank’s share fell to about 6.5 percent. The decline was driven by a drop in revenue in the second quarter as clients stepped back from trading with Morgan Stanley amid a credit-rating review by Moody’s Investors Service. Moody’s cut the firm’s grade two levels in June. The next month, Gorman announced that he was shrinking the fixed- income unit.
Kelleher’s promotion also sets up a management structure similar to when Gorman ran wealth and asset management and Walid Chammah headed institutional securities under then-CEO John Mack. Gorman beat out his fellow co-president for the top job in 2009, while Chammah became chairman of the international business before retiring this year.
Greg Fleming, 49, who runs the brokerage and asset- management units, and Kelleher now both oversee businesses that have contributed half of the bank’s revenue this year. Gorman, who is also chairman, said in March that he’s “just getting warmed up” and plans to be in the job for “a bunch of years.” He has no plans to name a president in the near term, according to a person briefed on his thinking, who asked not to be identified because the information isn’t public.
Fleming and Kelleher each face challenges in improving returns. Fleming has promised a 15 percent pretax margin in the brokerage business by the middle of 2013, up from 10 percent this year.
Eichorn and Petitgas, 51, will have responsibilities for global client coverage, mergers and acquisitions and capital markets. Eichorn will join the bank’s management committee along with Jeff Holzschuh, 52, who was named chairman of institutional securities and will focus on client relationships. Petitgas is already a member of the committee.
Taubman and Kelleher’s relationship had shown signs of improving after Gorman met with the pair together and separately after last year’s Bloomberg News article, according to two people who work with them. Enmity between Kelleher and Taubman had become a source of public jokes.
“So how’s that co-head thing going?” mergers chief Robert Kindler asked at a 2010 meeting of more than 100 managing directors at the Ritz-Carlton Battery Park hotel in New York, drawing laughter as he gestured at Kelleher and Taubman. Neither responded.
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