"The investment banking industry for all intents and purposes has disappeared," Morgan Stanley chief executive officer James Gorman said at a conference today in Manhattan.
He did not mean that Morgan Stanley or its rival Goldman Sachs would disappear or get swallowed up by one of its investment/commercial bank hybrid rivals like Citigroup and JPMorgan Chase, but instead that any bank that offers the full scale of services that Morgan or Goldman does — advising on initial public offerings and mergers, helping companies sell debt, financing deals for hedge funds and private equity firms, wealth and asset management for wealthy individuals, and selling financial products to companies and large investors — would be supervised and regulated by the Federal Reserve.
"They're all bank regulated and they should be, there should be one integrated system one governance process which we have in the Fed," Gorman said. Before the financial crisis, large investment banks like Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs did not have the same oversight and regulation as "universal" banks like Citigroup or JPMorgan Chase. That changed in September 2008, but Goldman and Morgan Stanley were the only ones left to be converted into "bank holding companies" in order to be more strictly supervised and have access to emergency aid from the Federal Reserve.
With that Fed oversight comes more strict standards for how much Morgan Stanley can fund its operations with borrowing, which means that its capital — money raised from shareholders or retained earnings — is precious and has to be allocated to where it can find high returns without using too much of it.
This has meant that Morgan Stanley, which before the crisis was in a desperate race to match Goldman's trading prowess, has concentrated more on wealth and asset management, which is less capital intensive and promises more steady profits.
"You choose the businesses where you can get the most efficient return on your capital," Gorman said, referring to Morgan Stanley taking full ownership last year of its then-joint venture with Citigroup, Smith Barney, one of the largest retail brokerages.
"[It's a]phenomenal business, low capital usage, great returns," Gorman said.
That rebalancing of the firm can be see in its first quarter results: $4.3 billion of its $8.9 billion in revenues came from wealth and asset management, while the rest came from all of investment banking, including sales and trading, underwriting, and advisory work. In 2006, at the height of the Wall Street trading bubble that almost brought down Morgan Stanley, only 18% of its revenue came from wealth management.
Gorman was sure to say that traditional investment banking and trading wasn't being abandoned, but instead that the firm was taking a balanced approach. "I wouldn't say we're moving away from it," Gorman said, "we've added half of the firm which is now what I call the ballast, it gives us stability in the storms." He completed the nautical metaphor by labeling the riskier, more capital intensive part of Morgan Stanley "the engine room" — "where if things are moving and the economy is charging you need to raise capital, you need to bring companies to market, you need to bring companies public."
One of those risky businesses, physical commodities sales and trading, however, is in the process of being sharply reduced. In 2013, Morgan Stanley agreed to sell its oil trading unit to Rosneft, the Russian state-controlled oil company. When it announced the deal, the bank noted that the oil business broke even, despite taking up $4 billion of its precious risk-weighted assets. Morgan Stanley in the 1990s was one of the pioneers of investment banks having a presence in controlling and trading physical commodities and it is still the controlling holder of TransMontaigne, which stores and transports oil.
"Every institution has to look at where they can get returns from the capital their shareholders have given them, and adjust their business accordingly, which we have done," Gorman said.