Levine on Wall Street: Morgan Stanley, Retail Brokerage

Morgan Stanley is really getting into wealth management. UBS can't quite quit investment banking. Bonds of bankrupt issuers are the best bonds. Europe is a mess.

Morgan Stanley bankers now have to talk to their brokers

This DealBook story about the cultural shifts at Morgan Stanley -- from a tony investment bank with a big trading operation into umm sort of a retail brokerage -- is full of great stuff but reaches its peak with its discussion of how now Morgan Stanley's investment bankers, embarrassingly, have to bring in wealth management advisers to pitch corporate executives on personal financial services:

Culturally, one of the biggest challenges with the expansion into wealth management was getting Morgan Stanley's bankers, traders and financial advisers to work together. Bankers are paid to structure mergers, and the executives they deal with often need financial advisers to manage their money. In theory, banking and retail brokerage businesses are supposed to complement each other, with one bringing the other business. But on Wall Street, it rarely works this way, because bankers tend to look down on brokers, whom they see as rather mundane.

Also because it is sort of gross to be like "well, we did this merger, now let's talk about your 401(k)"! (Or your mortgage.) But now that the brokers run the shop, that is changing. Here's CLSA analyst Mike Mayo:

"As a banker, you like wealth management a whole lot more when it is responsible for lifting the entire firm's stock price at a place where people are paid largely in stock," Mr. Mayo said.

I submit to you that, as a banker, your feelings about wealth management are decidedly mixed when they're the ones bringing in all the money. But some people inside the firm are with Mayo:

"I recently brought in a possible deal, and someone in banking actually returned my call," said one Morgan Stanley broker, who spoke on the condition of anonymity because of a firm policy against speaking to the media. "It's harder for the firm's bankers to call us idiots when we are driving the firm's earnings."

Those calls must be awfully fun for everyone.

Investment banking is just too tempting for UBS

UBS has historically been a big wealth management firm with an ambitious but occasionally explosive investment bank attached. After one too many explosions, UBS embarked on an effort to shrink the investment bank into a small, manageable, not that important appendage. Most people think that went pretty well, but here is a good Wall Street Journal article about how some people, including inside the bank, want to go further, and get rid of the investment bank altogether, or at least hive off a lot of it to Sumitomo Mitsui. The problem now seems to be that the investment bank is doing too well, and if your investment bank does well, the temptation to grow it back into an ambitious but occasionally explosive behemoth is irresistible:

Recently, Andrea Orcel, a veteran deal maker who runs UBS's investment bank, has been hiring bankers and traders in its fixed-income business. The move has raised eyebrows among rival banks and some analysts who thought UBS was still downsizing. The hiring, which UBS executives described as limited, comes as many Wall Street investment banks suffered a slump in fixed-income revenue in the third quarter. "The more success [Mr. Orcel] has, the more likelihood he will lobby to put more capital to work" in areas like fixed income, said Mediobanca analyst Christopher Wheeler.

Why should a little thing like a bankruptcy keep you from borrowing money ?

Jefferson County, Alabama, filed for bankruptcy two years ago and is behind on paying some sewer bonds, so it's decided to issue $1.7 billion in new sewer bonds. Will anyone buy them? Oh sure, probably; some of them are quoted here. (John Knox, a muni lawyer, is quoted saying, "I would rather lend to someone who has cleaned up their balance sheet rather than someone who hasn't," which is cogent enough in its way, though I don't think he'll be buying these bonds.) In a world where portfolio managers turn over every couple of years and concern themselves only with maximizing returns, memories get real short and reputational incentives like "if you don't pay off your bonds you may have trouble issuing new bonds" get weaker. Especially as hedge funds move into muni bonds; hedge funds are calculating rational creatures whereas I guess retirees or whatever hold a grudge.

How's the European banking union going ?

This story on European efforts to put together a centralized and funded resolution mechanism for failed banks is full of quotes that beautifully typify the European reaction to the financial crisis, which is to say slow, underwhelming and legalistic. "A fund needs a levy" on banks, "but the levy needs a clear legal basis. There are different opinions on that, but if you want a safe legal basis, you'd better take the safe route,"says German Finance Minister Wolfgang Schaeuble. "It would be logical to have a Council solution," instead of a European Commission one, said Swedish Finance Minister Anders Borg, because "We cannot have the commission being player and referee in the same match." (What is the game?) And Dutch Finance Minister and expert thrower-of-cold-water-on-European-hopes Jeroen Dijsselbloem said "I want to lower the expectations. It will be more like an exchange of opinions and as long as there is no government in Germany I don't see progress." It's all very terrible but I am going to choose to read it as a hopeful sign that conditions have improved to the point that nobody is actually that worried about bank failures being a systemic problem so they feel comfortable just floating around disappointing each other.

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    To contact the author on this story:
    Matthew S Levine at mlevine51@bloomberg.net

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