Banking analyst Glenn Schorr says he expects Morgan Stanley will make a modest profit in the third quarter.
But to grow profits it’s going to have to increase the amount of risk it takes and pay employees more.
Schorr recently met with Morgan Stanley’s CFO, Colm Kelleher and today produced a note on the talk.
Colm was candid in admitting that Morgan took almost no risk in 1Q09 as
management was very cautious, but they did up the risk quotient a bit in 2Q.
Morgan cut headcount by too much in the fixed income businesses in 2008 so
they did not participate in the rebound to the level of most peers. As a result,
they are in the process of rebuilding the footprint and continue to hire talent.
Unfortunately it will take time for the new hires to add to the top line so we
don’t expect to see much of a pick up in 3Q results for FICC trading, ex debt
Schorr also explains that Morgan Stanley has been caught off guard by the battle for talent on Wall Street. Just one year after the crisis that nearly destroyed Wall Street, firms are fiercely poaching talent. Morgan is “surprised at how hot the war for talent has become considering where the industry was just six months ago,” Schorr writes.
Schorr says that given the competitive environment and Morgan’s returns thus far, management may have a bit of a tough call on compensation expense for the rest of 2009 if revenues and profitability remain fairly subdued. In his view, management will “make the decision to compensate its employees in an effort to retain the enterprise value of the institution, even if there may be some headline noise that comes along with a higher comp ratio. “
In short, it sounds Morgan Stanley’s new business plan is the same as the old one: be more like Goldman Sachs.