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John Mack and Morgan Stanley have shared a few near-death experiences over the years. Mack, who will leave his post as CEO at the end of the year, is hailed by his fans as a hero for saving the investment bank from the brink of extinction in the financial crisis. Others bestow high marks for resurrection of the bank and morale after the troubled 1997 merger with Dean Witter that threatened the firm’s success.
But it was Mack’s penchant for amping up risk and increasing the firm’s appetite for trading and risky mortgages that nearly ruined his legacy. No surprise then that his successor James P. Gorman is cut from a different cloth. The bank Gorman inherits is still in flux and is morphing into a tamer version of its former self. The bank is no longer one that would even consider hiring someone of John Mack’s ilk to run it as CEO.
Times have changed. Since Morgan Stanley became a bank holding company, it gets far more funding from deposits, as opposed to trading and other leverage-based activities. It’s clear that the business will be a key focus under the new House of Gorman: The bank is shifting toward more fee generating businesses of brokerage and wealth management, which is Gorman’s background. According to Credit Sights, clients with $1 million to $10 million in assets represent about 40% of Morgan Stanley’s assets.
The Australian-born Gorman, who starts on Jan. 1, played a pivotal role in the discussions to do a purchase a stake in Smith Barney in a joint venture with Citigroup. He is currently co-president in charge of Morgan Stanley’s global wealth management, and joined the firm less than four years ago from Merrill Lynch where he also specialized in wealth management. Before that he was a senior partner at McKinsey & Company. No high-flying Wall Streeter is he.
While investment bank arch rival Goldman Sachs has also taken the bank holding company rout, it has elected to still focus on trading and fast profits. They just happen to do it better than anyone else. Morgan, on the other hand, has been dialing back “excessive proprietary trading positions,” says credit analyst David Hendler. That, says Hendler, is positioning the firm to focus on servicing customers through corporate finance and advisory businesses, marking … “a return to Morgan Stanley’s former strengths.” Gorman’s challenge will be to prove that a kinder, gentler and more rationally managed Wall Street firm will still make mean profits. And Mack, who will remain as chairman of the board for two years, may be forced to sit on his hands.