June 19, 2018
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Gorman’s lonely quest to save Wall Street’s honor

By William D. Cohan, Bloomberg View

There has been a noticeable dearth of leadership on Wall Street after the financial crisis.

Where are the senior executives willing to explain to the American people how and why the financial industry’s behavior got our economy into so much trouble and why that behavior needs to change if there is to be any hope of restoring the public’s confidence in our capital markets? Without that restored faith, you can pretty much forget about any economic recovery anytime soon.

Instead of rising to the occasion, Wall Street’s purported top rung – Lloyd Blankfein, the chief executive officer of Goldman Sachs; and Jamie Dimon, CEO of JPMorgan Chase – have been too busy either defending their own indefensible actions leading up to the crisis (Blankfein) or complaining about how new regulations are impeding profitability (Dimon) to give any thought to fundamentally changing the way Wall Street does business. So far, they have shown the opposite of leadership: blatant self-interest.

Fortunately, as Aristotle taught us, nature abhors a vacuum. And into the leadership breach has quietly stepped the Australian-born James Gorman, the 53-year-old former McKinsey & Co. consultant and Merrill Lynch & Co. executive who has been the CEO of Morgan Stanley since 2010 and both chairman and CEO since the beginning of the year. In his unassuming way, Gorman has come out swinging.

He started a buzz at the World Economic Forum in Davos in January, when Bloomberg Television’s Erik Schatzker asked him to explain why Morgan Stanley had taken the lead by instituting compensation clawbacks and deferrals and by capping cash payouts at $125,000 a year. Gorman said he would tell the following to employees who failed to grasp the logic of his decision. “You’re naive. Read the newspaper, No. 1,” he said. “No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem which is much bigger than the job. And No. 3, if you’re really unhappy, just leave. I mean, life’s too short.”

For good measure, he added, “The world has changed and the banking industry has gone through a fundamental change, and we have to readjust.”

Gorman expanded on this theme last week during an appearance on the “Charlie Rose” show. He said it was essential for Morgan Stanley to get back to helping its clients solve their problems, rather than focusing on ways to make a big financial score.

“The most important thing with any professional service firm is to tap the DNA to find out what it is that is the magic about the institution,” he said. “The magic of Morgan Stanley is the quality of the people dealing with exceptionally complicated problems, helping clients find solutions to tough situations. So my challenge is to get us back to those roots, to amplify those roots and t o let the organization run with it.”

He said the days of proprietary trading are over at Morgan Stanley. “That was sort of a stray off the reservation,” he said, adding that while a number of firms made a bunch of money trading for their own account, “Morgan Stanley had always made money serving its clients. That was our reason to be. That was at the core, as I said, of the DNA.”

While he didn’t mention Howard L. Hubler, a Morgan Stanley trader who was blamed for a $9 billion loss on an ill-timed proprietary trade in 2007, Gorman conceded: “We got envious. A lot of firms got envious. And it’s the problem with corporate strategy. You’ve got to stick to what you’re good at. Just because somebody else is good at it doesn’t mean you’re going to be good at it. And we started trying to be what somebody else was good at.”

He said it was time to accept greater regulation that will either prevent firms from engaging in proprietary trading or require them to hold so much capital in reserve as to make this activity economically unattractive. He said he is a believer in a steadier stream of consistent earnings.

“What investors want ultimately is certainty,” he said. “They want to know the strategy you’re on. Why it is that you’re going to succeed on it and they want to see consistent returns. In the proprietary-trading businesses, they’re very volatile. And investors discount it because they don’t know if you can repeat it the next quarter.”

Gorman’s big strategic bet on wealth management – Morgan Stanley bought 51 percent of the Smith Barney brokerage from Citigroup in January 2009 and is said to be negotiating to buy the remainder – and his push to refocus the firm on helping clients solve problems hasn’t shown up in the financial performance or the stock price, which has been a laggard in recent years.

One thing has become abundantly clear on Wall Street: Its customers and its counterparties are sick and tired of being gamed, and the firm – or firms – that first restores the trust that has been lost will be the most successful in the future.

William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist.

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