On the last white shoe firm


About three years ago, Morgan Stanley (MS) was run by a man named Phil Purcell. Purcell was not an banker, he was a McKinsey consultant. He used to run Dean Witter, which bought MS in 1997, and after a power struggle, ousted John Mack, the MS man in 2001.

Around 2005, when everyone was piling into sub-prime assets, conservative Purcell did nothing.  At the same time, over the heads of the much respected Vikram Pandit, John Havens etc, Purcell promoted his cronies, Stephen Crawford and Zoe Cruz to the Board. This caused a furore, and Purcell was hounded out by a group of eight former bankers, who made fancy presentations to show how MS had lost value.

John Mack came back as CEO with a lot of fanfare. Pandit, Havens etc were hoping to be re-hired, but they hated Zoe Cruz and wanted her out. Mack kept her, because it was well known on the street that Pandit was afraid of risk and Zoe Cruz wasn’t.

Morgan Stanley began to take a lot of risk.  Zoe Cruz had the right idea. She went short sub-prime, but to fund that trade, she went long a leveraged portfolio of super-senior assets. When the crisis hit, sub-prime fell by 80%, but the super-senior portfolio fell by 20%. As the anonymous risk manager confessed, 20% of losses on a leveraged super-senior portfolio was more than the 80% made by shorting a smaller subprime portfolio. Morgan Stanley lost billions.  Mack fired Cruz to save his own job.

The stock price when Mack came in was around $40. It did go to $70 or so with Mack, when all stocks went up, but now it is around $24, and Morgan Stanley is probably going to sell itself to someone, like Wells Fargo, in order to survive. I am not sure how Morgan Stanley Wells Fargo is better than Morgan Stanley Dean Witter, but there you are. When the markets are better, you can be sure they will play this game all over again.

Who benefits? I may not have the exact numbers, but Purcell made $125m and Crawford made $45m in severance, Vikram Pandit made $150m in selling the hedge fund that made no money to Citi, Mack made $125m so far, and will make more on a sale.  Poor Zoe Cruz only made $30m, I think.

For some reason I remember Herb Allen saying, “Over a long weekend, I can train my dog to be an investment banker”.  Each weekend these days, Paulson is reversing that training.

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