One of the key strategies articulated by new Morgan Stanley (NYSE:MS) CEO James Gorman is he’s going to manage risk far closer and better than the company leadership has in the past, and the company won’t be as aggressive in pursuing profits saying, “we will not have the outsize risk positions that will endanger the firm.”
Of course all of this is easy to say at moments at now where this is the obvious move, although there has been a lot of disillusionment over the performance of Morgan Stanley last year when they failed to take advantage of the big opening they and others had when competitors like Lehman Brothers and Bear Stearns failed.
Gorman is quick to add that while in some areas the company will be less apt to take out-sized risks, at the same time they’re not going to shy away from taking healthy risks with a lot of potential upside for gains.
Financial products with a lot of inherent complexity and which are large and concentrated will be avoided by Morgan Stanley, with more focus on growing the advisory side of the service of the company for its many clients, rather than always trying to hit home-runs and then striking out.
A lot of the problem for Morgan Stanley came from not only the terrible trading over the last couple of years, but they were really off in the timing of the trading, entering markets that had already ran their course and being stuck with dismal results. The best example of that was the real estate market, which they entered far too late.
Probably the biggest mistakes made were in the overall confusion in the company, as they were never on a even keel at the right time, and wavered and made decisions similar to a person that hears a stock is moving up from a trusted adviser, and then waits until it reaches high levels before they invest. Then they participate in the inevitable falling back of the price of the stock and of course blame someone else for the bad advise.
But this happened on the investment side and the lack of strong risk controls which would give the company and its traders confidence in doing trades with strong upside potential but limited downside risk. That wasn’t part of the company culture, at least to the point of it being an effective tool, and so they have reeled back and forth as forces seem to have ruled the company rather than the company riding the waves of what was happening at the time.
This is why it seems like every move at Morgan Stanley over the last two years was wrong, as they were based on the right data in most cases, but they were either implemented at the wrong end of the cycle, or was done without understanding the effects on the business, especially when the sub-prime mortgage market was weak and the division hedged to protect themselves and destroyed not only the extraordinary profits that had been made, but lost a huge potential for profits in the near future as well.
Again, the point is they didn’t have the ability or risk measures in place to be able to identify when it was the right time to invest and let it ride, or when to properly manage risk through hedging. In other words, they seemed to be without foundation or understanding of what was happening around them, and their cluelessness was shown in the performance of the company.
Already pressures are on Gorman from all angles to right the ship, but he’s going to have to take a long-term outlook on things, along with setting things that need to be set right before plowing into the revenue and profit strategy, which will never be operationally ready until risk managmenet put into place and adopted as part of the culture of Morgan Stanley.
Objectivity must be part of the overall picture for the company so the temptation to make trading moves in order to produce some temporary good numbers at the cost of the survival of the company don’t become embedded in the culture of the company again. Gorman will have to remain on his toes and fight the natural inclination to take reckless risk in order to keep the pressure off of him from the various sources always on the fringes of a company trying to move it toward their own ends in order to profit from it best themselves.
Gorman’s challenge will be to throw enough bone out their for the dog to chew on while under-girding the foundations of the company for long term survival, and ultimately – profitability.
