“Few believe that Gorman has the credentials to run a shop like Morgan Stanley. He has never run a major global business line in investment banking, capital markets or trading. His appointment is still met with puzzlement by industry watchers, especially when the firm has long-serving industry veterans on the payroll.”
That’s what I wrote back in March 2011, a year or so after James Gorman had taken over as CEO of Morgan Stanley as the legendary John Mack shifted solely into the chairman’s seat. My comments were at the time reported 100% correctly. But with the benefit of a dozen years of hindsight, the critical nuance that makes them sound so discordant today lies in the phrase: “a shop like Morgan Stanley”.
That’s the point here: Morgan Stanley now versus Morgan Stanley then.
To be crystal clear, it wasn’t me just making those things up. I’d never heard of Gorman when I wrote those immortal lines. What I wrote was a distillation of comments from a range of investment banking industry participants, plus, more pointedly, senior and long-standing Morgan Stanley insiders, who had taken it very personally that the banking and trading veterans who ran the major divisions had been passed over in favour of an executive with a background in wealth management at a firm that at the time was renowned, certainly internationally, as an M&A advisory, capital markets and trading shop.
Fast forward to today, and, as befits any major financial services succession race worth its salt, Gorman announced he will be stepping down as CEO in the next year without naming a successor, leaving a three-horse race that has already led to a barrage of speculation. Nothing the media, analysts and industry watchers like more than a good gossip about who the shortest odds are on.
So how did a wealth management executive get into the corner office? First, it’s worth looking at some numbers because they tell the story. At the end of Gorman’s first full year in office in 2010, Morgan Stanley’s institutional securities division, which houses its investment bank and global markets operations, accounted for 70% of pre-tax profits versus 18.5% for wealth management and 11.5% for asset management.
By the first quarter of 2023, institutional securities and wealth had broadly equalized, accounting for 50% and 45% respectively.
Compare that to arch-rival Goldman Sachs, where (excluding the loss-making platform solutions division) global banking and markets accounted for a full 86% of Q1 2023 pre-tax earnings while asset and wealth management accounted for just 14%. That split isn’t massively different from 2010: what was then called investment management generated 7% of pre-tax earnings against 93% for the investment banking and trading businesses.
And that’s the moral of the story: Gorman has not just presided over but has calmly, assertively driven a steady diversification of Morgan Stanley’s business model and revenue streams in a way that is hard to find elsewhere among large banks anywhere. Wealth and investment management acquisitions have helped give scale to an already-growing franchise and have helped Morgan Stanley amass in the region of US$5.4 trillion of client assets, landing it a position as one of the world’s money-management behemoths.
The pivot to wealth had started before the Global Financial Crisis, but urgently accelerated in the wake of the swinging back of the re-regulatory pendulum and, more particularly, Morgan Stanley’s near-death experience in 2008, which hardened the resolve of the board to switch gears. Stanley was only saved from collapse by huge infusions of cash from the Federal Reserve’s emergency lending windows, use of the US government’s Troubled Asset Relief Program and a last-minute equity infusion from Japan’s MUFG (which still owns more than 22% of the Wall Street firm).
Having been forced to take the axe to its balance sheet, spin out its proprietary trading businesses, dial down its client trading businesses, quickly build up capital and liquidity buffers, improve asset quality, reduce leverage and term out its funding, the way forward had been set. As had its leader in the guise of Gorman, who had joined Morgan Stanley in 2006 from Merrill Lynch as president and COO of the global wealth management group. Talk about being in the right place at the right time!
Gorman turned out to be one of the most accomplished banking leaders out there. The road to institutional and wholesale banking and financial markets nirvana is littered with the bleached bones of leaders who have fallen by the wayside, lacking leadership skills, lacking the temperament to think long-term, and lacking the patience to take a slow and steady approach to achieving strategic goals.
How many investment banks have set and continue to set strategy targets only to endlessly tinker with them, creating serial updates, iterations, reversals and changes of heart that confound shareholders and end up confusing clients and employees?
As banking and securities firms continue to transfer away from being high-risk-seeking casinos betting with other people’s money for their own benefit to becoming steadier, more diversified organizations driven by client need with less earnings volatility, the leadership skills needed to maintain resolute focus and build slow and steady returns need to change too. Gorman and the Morgan Stanley machine have shown it can be done.