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Finance and economics The Economist January 27th 2018 59
Also in this section
60 Buttonwood: Volatility’s eerie calm
61 Microfinance and disaster relief
61 Europe’s direct-lending funds
62 Nigeria’s central-banker shortage
63 Poverty and migration
63 Hyperinflation in Venezuela
64 Free exchange: Bank regulation

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Morgan Stanley Since the financial crisis, Morgan Stan-
Tediously does it ley’s results have improved steadily, albeit
only to their current level of barely ade-
quate. Its return on equity in the recently
completed year (adjusting for the oddities
of America’s recent tax reform) is 9.4%, not
quite up to that of a run-of-the-mill utility.
Mr Gorman’s new targets are for 10-13%,
NEW YORK somewhat closer to the overall market av-
The recoveryofMorgan Stanleyis a huge achievementwith, so far, modestresults
erage. On a recent conference call a finan-
ORGAN STANLEY emerged in 1935 flects more than bad luck. Its newest cial analyst asked him why the target was
Mout of a global financial disaster, as growth initiative—to profit from small cli- not higher. After all, Morgan Stanley will
one of Wall Street’s leading firms. In a rare ents it ignored in the past—has yet to prove enjoy a big boost from the tax overhaul,
shred of consistency in America’s turbu- itselfmore than an interestingidea. which will cut its tax rate from over 30% to
lent markets, history has repeated itself. The rising esteem for Morgan Stanley the mid-20s. MrGorman demurred, stress-
But it was a close call. An ill-timed infatua- came grudgingly at first, and then fast. The ingthatthe firm would onlyprojectreturns
tion with debt ahead of the 2007-08 finan- firm and its chief executive, James Gor- it felt were feasible even if conditions be-
cial crisis threatened to add it to the indus- man, are seen as having attributes com- come rough. To aim higher—and in particu-
try’s towering funeral pyre, which mon in many businesses but oddly rare on larto replicate the pre-crisisreturns on equ-
consumed all its big competitors with the Wall Street: a long-term vision; a plan to ex- ity ofmore than 20%—would mean “doing
exception ofGoldman Sachs. ecute it; and a record of bringing it to life. somethingyou don’t want us to do”.
Ofthe two, Morgan Stanleycame out of All the more unusual, these attributes omit Some of this coyness stems from Wall
the crisis the more tarnished, less for what the definingtraitofthe historically success- Street’s new arithmetic. Since 2006, Mor-
it did than for what it was: less profitable; ful investmentbank—wild, euphoric, glori- gan Stanley’scapital hasgrown from $35bn
less connected, through its formeremploy- ous years of profit (often then paid out to to $77bn and ithasslashed itsdebt: that has
ees, to political power; and less respected staffand lost in subsequent busts). eaten into returns on equity. Capital re-
for having evaded disaster. But after the re- quirements may fall a bit as regulatory
lease of financial results from the fourth models are tweaked (see Free exchange)—
quarterof2017, Morgan Stanley’svaluation Those were the days Morgan Stanley has been especially affect-
has surpassed Goldman Sachs’s. This re- Morgan Stanley ed bysome oftheirquirks—butthe permis-
flects not only the improvement in its prof- Compensation as sive mood ofthe pastisunlikelysoon to re-
itability but also investors’ greater confi- % of investment- Wealth-management turn. Often, when a chief executive
banking revenue
revenue as % of total
dence in how it is managed. explains barriers to profitability, a com-
Goldman, with some justice, finds the 100 50 pany’s share price sinks. Mr Gorman’s
comparison unfair. The two firms make 80 40 comments had the opposite effect. Sobri-
roughly equivalent returns and each is top ety is in vogue.
dog in global league tables for segments of 60 30 Underlyingthe resultsare large changes
the capital markets. Goldman might easily 40 20 to the firm. Itshallwaysstill buzzwith slim,
reclaim its edge in the next quarter. But its well-dressed, intense people of indetermi-
approach has a growing legion of doub- 20 10 nate age. But they are not quite the self-
ters. Fixed-income, currencies and com- anointed masters of the universe of the
modities, the mysterious profit centre from 0 2007 09 11 13 15 17 0 pre-crisis era. Pay as a share of investment-
which its chief executive, Lloyd Blankfein, banking revenues has dropped from a
graduated, has had a rough stretch that re- Sources: Morgan Stanley; Bloomberg peak of 78% in 2008 to 35% (see chart). In- 1