Geeze. What does veteran banking analyst Richard ‘Dick’ Bove have against Morgan Stanley?
Judging from his latest note on the bank, for relatively-new employer Rochdale Securities, quite a lot. Emphasis FT Alphaville’s:
Morgan Stanley has had a problem with timing for the past decade. It has generally moved with too little, or, too much, too late. The company has decided on a new thrust at present which is to increase risk and add personnel. The question, therefore, arises as to whether this effort is strategically sound.
The company did not foresee the end of the dot com boom and was hurt when the collapse developed. It had difficulty developing a strategy to deal with the new financial markets that developed in the mid 2000s. It charged into alternative investing at the wrong time in the cycle. It increased its presence in housing at the wrong time. It pulled back from the markets too dramatically when it should not have. It toyed with the argument that it should become a regional bank and then dumped the concept.
In sum, it has not created a durable strategy nor has it executed with consistency. This has resulted in an unstable workforce and erratic earnings performance.
Now the company has once again put together a new strategy and is pursuing the new strategy with a newly constituted management team. Part of that strategy is to employ more risk in operations. Another part is to add more people. It is taking these new steps just as the markets are emerging from a significant run up from their bottoms in March.
The company’s news is unsatisfying since it is being revealed without any backup or justification. For example, why should one believe that taking more risk is a wise business plan? Has Morgan improved its risk management procedures? If so, how? Does it has have a new computer system; new software; new databases; new IT personnel; new trading disciplines; etc? Or is it just hiring traders and giving them more money to invest?
In addition to rubbishing the bank’s historical performance, Bove places a huge question mark over MS’s future by comparing it to Lehman:
Is the company simply returning to a strategy that does not work? In the book A Colossal Failure of Common Sense by Lawrence McDonald, the inner workings of Lehman Brothers distressed debt trading desk are revealed. I found it shocking that Lehman’s trading consisted of guesses by professionals and a total lack of discipline. Is this what Morgan is talking about doing?
He signs off, simply:
Morgan continues to fail to articulate a strategy. This is not positive.
Only, of course, Morgan Stanley does seem to have a strategy — it is just one that Bove does not like.
Now, we tend not give too much credence to Bove’s banking calls, but this particular note touches on a wider issue for Morgan Stanley, and investment banks in general. MS was lambasted in July, after posting yet another quarterly loss, for not assuming as much risk as its competitors — notably Goldman Sachs.
The bank, led by CEO John Mack, is apparently trying to reverse that ‘sensible’ banking image.
There are clearly going to be some people, like Bove, who disagree with that strategy. What’s more (and we can’t believe we’re saying this) Bove might be onto something here.
As we’ve noted before, it wasn’t necessarily reduced risk-taking that led to Morgan Stanley’s latest loss, but simply that the bank tends not to make that much money when it does ratchet up the trading risk.
Related links:
Morgan Stanley and VARiations – FT Alphaville
Richard Bove ♥ banks – FT Alphaville
Richard “I’ve got a problem” Bove - FT Alphaville