Morning Coffee: Morgan Stanley's choice of CEO suddenly looks more fortunate. UK redefines what it means to be a superstar banker

Now and then, you might hear an old banker say that “if you wouldn’t be happy to see a piece of business splashed all over the Wall Street Journal, don’t do it”.  And the truth of this rule of thumb is regularly demonstrated by stories like yesterday's investigation into the wealth management business at Morgan Stanley, which has previously been seen as the jewel in the company’s crown.

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By the nature of what they are, any failure of money laundering controls is going to end up generating customer relationships that look really, terrible when set out in cold hard print.  And the Morgan Stanley issues are no exception; they are the sort of ripe mix of political, criminal and extremist links which one normally associates with the kind of Swiss banks that don’t exist any more.  Indeed, some of them do stem from the acquisition of Credit Suisse’s Latin American wealth management business back in 2015.

This is potentially one source of relief to Morgan Stanley – most of the problems seem to date from before 2022, when Andy Saperstein (the head of global wealth management who once refused to cut his hair) launched a big improvement plan to upgrade processes.  But that’s only a little crumb of comfort.  Two years ago isn’t really enough of a gap in time to credibly describe things as “legacy” issues, even if MS is now saying that things are much better now and “indeed, the prioritization and scale of our investments in our onboarding processes is rapidly transforming these functions into an organizational strength”.

Understandably, perhaps, the issues haven’t really been publicised to shareholders and customers. Instead, the narrative surrounding Morgan Stanley’s wealth businesses has been very sunny over the last couple of years. Back in 2023, Saperstein was widely regarded as the frontrunner to take over as CEO when James Gorman stepped down; perceptions might have been very different if people had known about internal documents revealing that 25% of international wealth management clients were regarded as “High/High+” risk, and controls were rated as “weak”.  The succession committee which chose Ted Pick instead might feel like they dodged a bullet.

The WSJ investigation might even be seen as casting a retrospective pall over James Gorman's tenure as CEO.  Some commentators have been saying for years that the secular wealth management growth story at Morgan Stanley was simply a skilfully executed roll-up of an industry with seriously negative long-term demographic trends.  The revelation that some of the acquisitions have brought regulatory trouble to Ted Pick’s door will only reinforce this.  As will the news that when E*Trade employees were brought in after the acquisition, they were shocked by how basic and paper-heavy the MS processes were.

Wealth management is often seen as a low-risk, high quality earnings stream.  But that’s only the case if you manage to execute everything absolutely perfectly.  If you make a mistake, it can cause huge problems.  And another phrase meaning “low risk, as long as you do everything perfectly” is “high risk”.

Elsewhere, British bankers will probably, on balance, be cheering for the new Bank of England plan to relax the rules on deferred bonuses.  Some of the bonuses for senior staff will be payable in the current year, and the overall deferral period is being shortened from seven years to four or five. (Research suggests that most risk management disasters take less than four years to be discovered, something worth knowing if you’re planning one).

But the joy may be tempered by a small but measurable blow to the ego.  The Bank also intends to significantly reduce the scope of the category “material risk takers”, who get the strictest regulation of their compensation.  Going forward, this will only apply to people who are either in the top 0.3% of their firm’s earners, or who have a demonstrable and significant influence on the risk of the company.

Previously, the threshold for being considered a material risk-taker in the UK was as low as £500,000 total compensation.  So although a mid-ranking Vice-President in equity research or M&A advisory will be able to get their hands on the money a little quicker, they will no longer be able to maintain the pretence that what they do matters.

Meanwhile …

As former colleagues from UBS are prepared to testify, Andrea Orcel believes in doing the analysis, but once his mind is made up, it doesn’t change very easily, and he’s not scared of having people be cross at him.  That’s a useful quality to have when you’re launching two different acquisitions at the same time. (Bloomberg)

In 2020, at the height of Black Lives Matter, a lot of financial firms made commitments to DEI initiatives.  However, those initiatives haven’t been immune to cost-cutting programs over the subsequent few years, causing some DEI professionals to feel a bit burned. (Financial News)

Thomas Fitzmaurice has joined Hasma Capital, the family office of one of Saudi Arabia’s biggest families.  He was previously in charge of the family office of Rupert Murdoch’s eldest daughter. Presumably the new contract has a tough “will not provide script advice to any sequels to Succession” clause. (Bloomberg)

Definitely a sign of where we are in the cycle – US Bank, a Minneapolis-based super-regional retail lender, is planning to expand its investment banking unit.  (Banking Dive)

And possibly also a sign of a different cycle (although it might just be motivated by age discrimination laws).  Apax Partners has increased the mandatory retirement age for equity partners from 60 to 65.  The original age limit was meant to help facilitate succession planning. (Financial News)

The Great Unpodding continues, as Millennium is giving $1bn to a standalone hedge fund called Scopia to manage.  At the same time, they’re hiring Chris Tuzzo and Warren Empey to run a merger arb fund, but under a separate brand rather than as a pod within the multi-strategy fund. (Bloomberg)

An Indian influencer interviewed bankers in London, and found one that was making £300,000 salary. His followers were seemingly unfamiliar with the “material risk takers” regime, as they responded that this was surely impossible. (Hindustan Times)

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