Since taking the reins at Morgan Stanley in 2010, CEO James Gorman has guided the firm with a managerial style that boils down to telling people, more or less: You’ll get it when you’ve earned it, “it” being anything from personal space to money to his respect. On the point of compensation, last year he told employees complaining about what they were paid to either open a newspaper and get over themselves or do everyone a favor and quit. Today brings news that this year, he’s doubling down on that mandate and daring anyone to make something of it. Read more »
Bonus Watch ’13: Jim Gorman Gives Employees The Option To Either Take Their Bonus In Three Easy InstallmentsBy Bess Levin
If you’re looking for a cheerleader, go bark up another tree.
“Say you want to be out ahead of it and give a lot of speeches and talk about all the good we’re doing,” Gorman said today at an industry conference in New York. “And then some trader does some stupid thing like this guy at UBS did and he’s in jail and all bets are off,” Gorman said. He was referring to Kweku Adoboli, the UBS AG trader convicted of fraud this month in the largest unauthorized trading loss in British history…Traders at New York-based Morgan Stanley had too much latitude in the past, “what I call having an outsized sandbox,” Gorman, 54, said at the conference, which was sponsored by the Securities Industry and Financial Markets Association. “Until we can be really confident we’ve got discipline around the sandboxes, I think you have to be really careful not to be holier than thou,” Gorman said. “We’re going to be in the doghouse for a while.”
A value-at-risk model basically works like this. You have some stuff, which is worth X today. Tomorrow it will be worth X + Y, where Y ranges from more or less negative infinity to positive infinity. Y is a function of a bunch of correlated random variables, rates and credit and stock prices and general whatnot. You look at a distribution of moves in those variables and take (usually) a 2-standard deviation daily move; if 95% of the time rates move by -10 to +10 basis points, your VaR model will assume a -10bp or +10bp move, whichever is bad for you. You take the 95%-worst-case, taking into account correlation etc., and tot up how much you’d lose in that case. Then you write that number down and feel a bit better, since you’ve sort of implicitly replaced “we have $X today and will have some number between negative and positive infinity tomorrow” with “we have $X today and will have some number between ($X – VaR) and positive infinity tomorrow,” though of course the first statement is true but unhelpful and the second is not true and also unhelpful.
But that aside! You get your VaR from a distribution of your variables, but the obvious question is what distribution. A good answer would be like “the distribution of those variables over the next three months,” say, for quarterly reporting, but of course that is only a good answer because it begs the question; if you knew what would happen over the next three months you would, one assume, always end those three months with more than $X and this VaR thing would be moot or moot-ish.1
So instead you look at things that you think will allow you to predict that future distribution as accurately as possible, which is epistemically troubling since VaR is a measure of how inaccurate your predictions might turn out to be. Anyway! You pick a distribution of variables based on the sort of stuff that you always use to estimate future distributions in your future-distribution-estimating business, which could mean distributions implied by market prices (e.g. option implied vol) but which seems to mostly mean historical distributions. You look at the last N days of data and assume that the world will be similarly distributed in the following M days, because really what else is there to do.
Picking the number of days to use is hard because, one, this is in some strict sense a nonsense endeavor, but also two, the world changes over time, so looking back one year is for instance rather different from looking back four years. Here is how different: Read more »
Buried in a footnote1 a while back I ruminated on the fact that, in the deal where Morgan Stanley bought a chunk of its Morgan Stanley Smith Barney brokerage JV from Citigroup, Morgan Stanley got a sort-of-free option to buy the rest of Smith Barney, and how that option is (1) valuable and (2) sort of cheap funding. That was basically all wrong, sorry! The lesson is, never read footnotes.
Charlie Gasparino is reporting that “Morgan Stanley chief James Gorman is making a full-court press with regulators to expedite the purchase of the remaining piece of the Smith Barney brokerage firm from Citigroup, moving up the buyout date as much as two years ahead of schedule,” so I guess Gorman puts the time value of that option at zero or less. As for cheap funding, Goldman had a research note this week saying that they met with Morgan Stanley and heard the same story, and also that:
At the margin, full MSSB ownership should have a meaningful impact on ROE as: 1) MS is still paying Citigroup a portion of earnings from the JV despite holding capital to support the entire business, 2) synergies with the Institutional Securities business will grow (i.e. client flow routing), and 3) the funding profile and client product offering mix will improve.
I think the second two things say something like “Citi won’t appreciate us shoving all of our MSSB customers into high-margin Morgan Stanley products, so we have to get rid of them before doing that,” though you could read them otherwise. The first thing calls the cheap-funding argument into some doubt, though maybe not that much doubt; Morgan Stanley’s capital is by some metrics cheaper than Citi’s, while its (credit market) funding is more expensive, so maybe this is still a good deal.
Anyway here’s what Gasparino has to say about the delay: Read more »
They’re not there yet, however; first, they’re going to send James Gorman a strongly worded letter about the issue and make a decision based on his response. They do sound pretty miffed though, so God help the guy if his answer is anything but “I’ve got my tool kit and I’m on the way over.” Read more »
Bloomberg: Not One Bank CEO Can Fill Jamie Dimon’s Shoes, Especially Not That Guy From Australia Who Doesn’t Own An IronBy Bess Levin
Earlier today, Bloomberg ran a lengthy piece about the latest crisis on Wall Street: a lack of Jamie Dimon. Specifically, a lack of Jamie Dimon telling meddlesome regulators, anti-industry populists, know-nothing Congressmen, and hypocrite bastard newspapers where they can go and what they can suck. True, it’s not as though he’s gone anywhere, and he’s still reminding people “it’s a free fucking country” but “juggling multiple investigations and a $5.8 billion trading loss on wrong-way bets on credit derivatives” has left his hands a little tied and, some believe, cost him his once untouchable “stature” in the industry.
And while one should never simply offer problems without solutions, Bloomberg isn’t gonna sugarcoat this one: when it comes to “any kind of credible statesmen” to step in for JD, Wall Street is shit out of luck and not just because no one besides Lloyd came close in sales of their respective Bankers At Work And Play pin-up calendars. Among current CEO’s, Lloyd Blankfein, Brian Moynihan and Vikram Pandit are deemed too busy “fixing their own firms or repairing their reputations,” while Wells Fargo chief John Stumpf, though respected among his peers, is ruled out due to geography (“Part of Jamie’s fitting into that role was his natural brashness as a Wall Streeter and New Yorker, and that is not John”).
The House of Gorman will be saying good-bye to a few thousand Little Jims before year-end. Read more »