Partnoy's Complaint About Morgan Stanley


Blood in the Water on Wall Street

By Frank Partnoy

Norton 252pp $25

Morgan Stanley is one of the most prestigious names on Wall Street. Key to its reputation and profitability are its close relationships with many governments and blue-chip companies. The firm's name has recently become more elaborate--Morgan Stanley, Dean Witter, Discover & Co.--but to date, it has remained unsullied.

Frank Partnoy, the author of F.I.A.S.C.O., says that shouldn't be so. After spending just over a year at Morgan Stanley as a 27-year-old associate who structured and sold derivatives, Partnoy says the firm isn't living up to its reputation. The Yale Law School graduate's insider account of his time there alleges that Morgan Stanley bilked its customers by selling them costly and dangerous derivatives.

Partnoy's goal--laying bare possible hidden truths--is admirable. But F.I.A.S.C.O. is no Liar's Poker, Michael Lewis' hilarious account of the Salomon Brothers Inc. trading floor in the 1980s. Besides its shortage of humor, F.I.A.S.C.O. is weighed down by an earnest mission: to warn readers about derivatives. His tales of trading-room antics--such as how a trader at CS First Boston, Partnoy's first employer, paid a secretary $500 to eat a pickle drenched in hand cream--are secondary to lengthy explanations of the derivatives sold by Morgan Stanley and his recap of recent derivatives disasters.

Partnoy tries hard, but few subjects are as boring as derivatives. He offers evidence that it is insane for public pension funds and small Midwestern insurance companies to buy complex derivatives. He does a good job of explaining how derivatives let companies end-run legal regulations and how they are often not what they appear to be. And Partnoy reveals that from 1993 through 1995, 70 people in the Derivative Products Group made $1 billion for Morgan Stanley--implying it couldn't have made that much without aggressively selling products its clients didn't need. Morgan Stanley has issued a general statement saying the book is "a combination of inaccuracies and sensationalism."

It's hard to believe Partnoy fabricated such an elaborate portrayal of himself and his colleagues as fee-hungry hooligans with little regard for their customers. But the author provides little hard evidence that Morgan Stanley systematically mistreated its customers by selling them garbage products. He describes financial instruments that Morgan Stanley created and sold, such as repackaged asset vehicles (RAVs), and principal exchange rate linked securities (PERLS). It's a mystery why anyone who understood these risky and complex vehicles would buy them. But Partnoy doesn't give examples of customers who lost money, complained, or sued Morgan Stanley because they were harmed by these deals. In fact, in one trade where the firm collected an astounding $75 million fee, Partnoy says the customer made big money as well.

Partnoy also alleges that "Morgan Stanley carefully cultivated this urge to blast a client to smithereens." The title, F.I.A.S.C.O., stands for "Fixed Income Annual Sporting Clays Outing," which was a company party that he and his colleagues attended one year. Partnoy says "shooting doves or clay pigeons was excellent training for the even more exhilarating real-life kill, when the shrapnel of a complex financial instrument tore through a wealthy, unsuspecting human pigeon." Huh? Could it be that shooting clay pigeons is just an amusing, macho thing to do?

The author further suggests that a "violent" culture extends all the way up the ladder, to Morgan Stanley President John Mack. But Partnoy had no contact with Mack, and all of his evidence for this assertion is hearsay. Nor is Partnoy's argument for Morgan Stanley's "feral" atmosphere compelling. At one point, he describes how one of his bosses placed on his desk a photo of two rabbits from a guns-and-ammo magazine with the inscription, "Hi, Frank!" Partnoy's interpretation: He "must have wanted to make it clear to me that I needed to be able to shoot those bunnies right between the eyes, without hesitation. The bunnies were no different from our derivatives customers."

Compare that leap of logic with a much more direct quote from a Bankers Trust trader, contained in papers from Procter & Gamble's lawsuit: "What Banker's Trust can do for Sony and IBM is get in the middle and rip them off."

Partnoy also reports being incredulous when he first heard the phrase, "ripping a client's face off." For better or worse, that's established Wall Street trading-room vernacular. In Liar's Poker, Michael Lewis describes a similar moment in his Salomon Brothers training class. "`The f---ing frogs are getting their faces ripped off,' said the Human Piranha...."

After close reading, it's hard to avoid feeling that Partnoy is not being completely honest. Employing cautiously worded statements, he seems to be stretching his somewhat skimpy experience over too large a set of allegations. This sleight of hand shows up even in small matters: To make his point that Morgan Stanley had a prime midtown Manhattan location, he says its building overlooked "the famous Rockefeller skating rink." It doesn't--the rink is down the street.

But even if it's exaggerated, Partnoy's complaint does capture the predatory, dog-eat-dog climate of Wall Street. Ultimately, the author's guilty conscience drove him out: He is now a law professor in California. Earnest young MBAs should take warning.

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