During 2009, Morgan Stanley dramatically underperformed both Goldman Sachs and JPMorgan in the performance of its securities business, particularly in the area known as FICC (fixed-income, currencies and commodities). The Financial Times article from February 1st 2010 entitled Morgan Stanley In Hiring Push has more details.

According to Morgan Stanley's new chief executive, James Gorman, Morgan Stanley plans to hire several hundred new traders over the next several years to hopefully close the gap with Wall Street trading rivals. Rather interestingly, he stated "We are not showing clients enough. We don't have people on the ground. We are not sufficiently penetrated with large clients and there are some smaller clients we are missing out on." He continued: "We need to seriously grow our footprint in products like currencies, equity derivatives and commodities. We could easily be 25 percent bigger than we are. [Investor's] bias is to do more business with [Morgan Stanley], the burden is on us to deliver."

What Toomre Capital Markets LLC ("TCM") finds so interesting with the article is the degree to which Morgan Stanley under-performed. Apparently, in 2009 Morgan Stanley had revenues of $5bn in fixed income trading (or $8.8bn excluding an accounting loss) compared with $17.6bn at JPMorgan and $23.3 recorded by Goldman Sachs. Put another way, Morgan Stanley's FICC unit only generated revenues one half of JPMorgan's revenues and thirty-eight percent of what Goldman Sachs recorded. WOW!! Clearly Morgan Stanley is not even close to its two rivals in this business area, which is counter to what many market participants perceive.

The article concludes with the thought that the need to add more traders and sales people to better staff the basic product areas of this business unit is an admission that at least one of former CEO John Mack's decisions was wrong. His decision to focus on various complex derivatives and associated products popular before the credit crisis left Morgan Stanley ill equipped to benefit from the pick-up in the trading of simpler fixed-income products.

President Obama continues to try to curb risk taking on Wall Street. Today, one year after his inauguration, he has proposed a plan to limit the size and activities of big commercial banks. "While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse," said President Barack Obama at the White House. Mr Obama continued his populist rhetoric with the statement:

My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.

According to congressional sources and administration officials, this proposal is designed to return — at least in spirit — to some of the curbs that were instituted with the Glass-Steagall act back during the Great Depression. This plan has been backed by former Federal Reserve Chairman Paul Volker and is designed to limit the amount of risk that customer deposit activities might be exposed to.

Apparently President Obama wants to prevent commercial banks and institutions that own banks from owning and investing in hedge funds and private-equity firms. Similarly he hopes to limit the amount and type of proprietary trading that they might do for their own accounts. As a result of these proposals, the common equity securities of the large banking institutions have sold off as investors are unsure about what type of business models these banks might pursue in the future and hence what "normalized" profits might be.

Toomre Capital Markets LLC ("TCM") wonders whether any of these populist proposals will eventually be enacted into law. As Ace Greenberg, the retired CEO of Bear Stearns, said on CNBC today about the possible return of Glass-Steagall: "The egg has been scrambled and I don't think they can put it back in the shell." However, they are sure to appease those on Main Street that are disappointed with the bank bailouts and the large Wall Street bonuses.

Toomre Capital Markets LLC ("TCM") is an active consultancy in the areas of structured finance, risk management and financial engineering. As a result, we have many conversations with numerous people across the spectrum of clients, prospects, former associates and other industry contacts. In the past several months, many of these conversations have touched upon Lehman Brothers, especially given Lars Toomre's personal history of working there and back in the 1980's running that firm's very influential ABS and mortgage derivatives trading business(es).

Given that that specific business area in the fixed-income markets is at the heart of the current credit crunch in the Capital Markets, many have asked more privately just what Lars has been thinking about the on-going market developments. Lars has specifically made a point (until now) on refusing to comment publically about Lehman Brothers and the recent sacking of his former boss, Joe Gregory, who until recently was the President of Lehman Brothers.

On Friday July 11th 2008, yet another contact queried what Lars thought about the on-going melt-down in financial equity securities, particularly those currently in the news such as Fannie Mae, Freddie Mac, Citigroup, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch and Morgan Stanley. We talked through the various plus and minuses of these potential investments. This contact, who runs a multi-billion dollar portfolio on a leveraged basis, then asked Lars to put on his theoretical trading hat and suggest some specific trades. Lars demurred.

Toomre Capital Markets LLC ("TCM") has been rather quiet in recent weeks about the investment banks and the on-going credit crunch started by sub-prime mortgages and the bursting of the real estate bubble. While some in the industry (like Dick Fuld, CEO of Lehman Brothers, and John Mack, CEO of Morgan Stanley) have suggested that the credit crunch is closer to the end, Lars Toomre and Toomre Capital Markets LLC have subscribed to the view that the collapse of Bear Stearns was just the nasty end to front edge of a massive credit deleveraging hurricane.

In the time since the Federal Reserve helped to broker the sale of Bear Stearns to JP Morgan (with some $29 billion dollars of potential assistance) on March 17th, the capital markets have stabilized. Credit default spreads have narrowed from extreme wide spreads. The equity markets rallied from the March lows. Also, in many fixed-income product sectors, spreads to risk-free securities have significantly narrowed from oversold conditions. In short, the massive oversold (or biased) positions in the Capital Markets have had time to return to more stable conditions.

Or at least that was the case until the last ten days or so when slowly conditions have started to deteriorate again. Are these deteriorating conditions indications of another wave of the credit hurricane about to hit the Capital Markets? Time will tell. TCM suspects that market participants are about to learn that various financial firms did not perform well during the second quarter and that there will be further asset write-downs in various portfolios where liquidity has been sharply curtailed due to the credit crunch. Such news will be no great surprise.

Amidst the turbulence of the various news reports about layoffs, resignations and common stock declines, TCM has begun to wonder just where is there value in the major investment banks [Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers] and their universal bank counterparts [Barclays, UBS, Deutsche Bank, and Credit Suisse]. What are these franchises really worth in a world of sharply reduced liquidity and where new regulations on risk and capital are likely to be imposed? Assuming that these institutions go back to the "old days" of client flow trading, aren't each of these franchises worth significantly less than their current market values? Reader comments and thoughts are welcome.

On Thursday March 1st 2007, the United States federal regulators filed civil (and unspecified criminal) charges against 11 individuals and three entities in connection with two insider-trading schemes in which insiders (employees) at UBS Securities LLC and Morgan Stanley allegedly provided inside (non-public) information that helped hedge funds, brokers and others make at least $15 million in illicit profits. According to Reuters, "eight Wall Street professionals, two broker dealers, a day-trading firm, and three hedge funds are accused of participating in a scheme that used information stolen from UBS and Morgan Stanley."

[Update: The SEC has now released a press release entitled SEC Charges 14 in Wall Street Insider Trading Ring; Defendants Include Hedge Funds, Lawyers and Professionals at UBS, Bear Stearns, and Morgan Stanley with more information on the participants. Those charged include: Mitchel S. Guttenberg; Erik R. Franklin; David S. Tavdy; Mark E. Lenowitz; Robert D. Babcock; Andrew A. Srebnik; Ken Okada; David A. Glass; Randi E. Collotta; Christopher K. Collotta; Marc R. Jurman; Q Capital Investment Partners, LP; DSJ International Resources Ltd., which does business as Chelsey Capital; and Jasper Capital LLC.]

According to The Wall Street Journal, "The Securities and Exchange Commission said that in one scheme, which was ongoing since 2001, a UBS executive director, Mitchel Guttenberg, illegally tipped off at least two traders to information about upcoming UBS analyst stock upgrades in exchange for sharing in the illicit profits. One of the traders illegally traded on the information for two hedge funds and in his and his father-in-law's personal accounts, the SEC said."

The other scheme was said to involve Randi Collota, an attorney in Morgan Stanley's global compliance department, and her husband. They apparently provided information about upcoming corporate actions to a Florida broker in exchange for sharing in the some portion of the illicit profits that resulted.