Mack is no Blankfein, thankfully

July 22, 2009

John Mack is being pilloried by some on Wall Street for not being more like Goldman Sachs’ Lloyd Blankfein, after Morgan Stanley reported a larger-than-expected second-quarter loss largely because of several onetime expenses.

But the “Be like Lloyd” rallying cry is mainly coming from traders with Twitter-like attention spans, who simply want Mack and Morgan Stanley to engage in the same kind of government-backed risk-taking that Blankfein’s Goldman Sachs is doing when it comes to proprietary trading.

Just how much less risk is Morgan Stanley taking on compared to Goldman?

Simply compare both firms’ so-called value at risk, an estimate of how much money a firm could conceivably lose in a day if all of its trading bets and hedges went awry. At quarter’s end, Morgan Stanley’s VaR was $154 million, compared with $245 million at Goldman.

Admittedly, the VaR is a highly imperfect way of measuring risk. If anything it underestimates risk, otherwise Lehman Brothers and Bear Stearns might still be with us. That said, however, the numbers speak for themselves: Goldman is an infinitely more risky firm than Morgan.

Sure, it must be tempting for Mack to simply pile on risk and try to replicate the outsized trading revenues Goldman churns out. Indeed, the federal government has all but given the green light to Goldman to resume its hedge fund trading ways — except now Goldman can trade with the implicit knowledge the government won’t let it fail.

That was a road that Morgan Stanley presumably could have taken as well, but the firm has instead decided to go in a more conservative direction.

Mack’s strategy of de-emphasizing prop trading as a main revenue driver and getting back to the basics of asset management and investment banking is a smart move. The trouble is it will take time for Mack’s strategy to play out, and it may not start bearing fruit until an economic recovery is under way.

For example, Morgan Stanley ranks first in advising on corporate deals. But that enviable ranking doesn’t bring in a lot of cash when deal-making stands near an all-time low.

Mack’s decision to focus less on prop trading will no doubt prevent the firm from becoming the target of all the populist outrage Goldman has rightfully earned. With some regulators starting to talk about a windfall profits tax on so-called too-big-to-fail institutions, Goldman might come to regret its heavy reliance on trading profits.

Still, short-term investors may not have the patience for Mack to deliver. That’s their loss. For investors with a longer-term outlook, Mack’s more sensible approach to risk taking and trading should prove to be a better business model. (Editing by Martin Langfield)


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I do not understand this moranic bile against Goldman. Anyone who owns stock is happy about their performance. Those that are not should sell at a profit. Those that do not own any Goldman stock should simply shut up.

Posted by George Fay | Report as abusive

I agree, they lose money the “old fashioned way”

Posted by Jim | Report as abusive

George, you sir know nothing about the reality of what Goldman has leveraged. I will spell it out for you. TAX PAYER MONEY. Telling people to sell or shut up shows your ignorance to what the author is saying. Goldman should have a vast knowledge of risk adjusted returns and VaR. The returns they generated had no risk because of the government- this is anti-competitive at the very least. Goldman was cherry picked by friends in high places. Now, all of this is the governments fault and Goldman knows they have outwitted a bunch of know-nothing attorneys in Washington. Goldman is now trying to damage control by paying market value for the warrants the government holds. This is a PR move. Shame on our government for its shortsightedness and ignorance. Shame on you portraying your misguided opinion as fact.

Posted by Matt T | Report as abusive

Mr. Fay it is not moronic bile. I think what is need is historical research about the Savings and loan scandal plus understanding of basic addition and subtraction.

Goldman was behind the fall of their serious rivals, they set up AIG so that the money they loaned to agents would not fall on them. they got back 13 Billion form AIG because the Goldmanite insides did not allow AIG to fall like it legally should have; via the rules fostered after the Savings and loan scandal+the Great Depression legislation of the New Deal.

YOu aught to have know that they also received TARP funding and god knows how much The Federal Reserve gave them-Congress knows-We don\’t. They have given us the Taxpayer the Proverbial middle digit-which means the middle finger my friend. By the finger I also mean they have gone back to the same risky murky behavior that got us into this mess starting in late 2003.

I utter again this was our money-our kids and grandkids money that they are flaunting. Why they havent been investigated yet is nothing less than a miracle of Congress.

So MR. Fay- I hope you are younger than me. Im 25. IF there is moronic bile I believe you would not know it being throwm let alone its odor or color if you or people like you cannot see the gravity of this situation.

IT is because these people are gambling in this manner that the American people are suffering. I dont think you know how Wall street works in theory. Most companies big and small need to borrow money to operate daily-if they cannot get the liqudity needed to do this. they cant pay into your pension, healthcare, wages, or the materials needed to further the business. Wall Street is a nexus of loan collectors and distributors if they do not have enough liquidity or they get too greedy- we are all screwed since the seventies we have been more tied to the hip with them-dangerously so, and they have distored regulation in their benefit so that they can maximize profits over the needs of the overall benefit for the greater economy

So Mr. Fay What Goldman is doing is a serious slap in the face, and dangerous.

Posted by Sarah Honea | Report as abusive

VAR $154 million@MS compared with $245 million@GS => “Goldman is an infinitely more risky firm than Morgan.”

hmm, interesting. I wish I can pass my exams with this level of math skill…

Posted by Liye | Report as abusive

To be less sarcastic: the point is that Morgan generated less than 30% of Goldman’s trading revenue while operating at 60% of Golaman’s VAR (which is a linear measure). It’s not just about risk taking. Competence played a big role here.

Posted by Liye | Report as abusive

I agree 100% with George. Sarah, you back to the kitchen where you belong, or at least read up on finance.

Posted by A Bit of Truth | Report as abusive

Sarah and the others who are upset that Goldman is making money. You guys really need to learn some economics. GS and other banks paid back your TARP money at interest. I’m sorry more of your taxpayer (and mine) money didnt goto failing organizations like GM. So if this had become an AIG situation, you would have been happier? What an idiot.

Were you also the same person who said we should provide a windfall tax on Exxon when oil was at $150? If you want to live in a socialist society, move out of the U S of A. If you want a trickle down effect, let firms like Goldman suceed and everyone wins.

Btw, firms like GS doing well help insurance companies and pension funds do well…you know, 2 things everyday people can benefit from. So before you utter stupid things, just realize that money gets spread throughout the economy…even when a GS employee buys a Ferrari.

Posted by capitalist pig | Report as abusive

GS recieved $10 billion of TARP capital, all of which has been repaid + a 23% return of tax payers. It’s now well known that both GS and JPM did not want to take the TARP funds because they didn’t need it, but they were forced to do so by Treasury and Fed. GS also was paid the full amount of the CDS contract wit AIG after that firm was nationalized. I’m sick of everyone being jealous that GS pays its employees so well. This is the smartest firm on wall street and they prove it time and time again. Stop crying about a feux scandal, and get your facts straight.

Posted by Travis | Report as abusive

[...] Matthew Goldstein: Mack Is No Blankfein, Thankfully [...]

I love a good conspiracy theory. Can you enlighten us on how Goldman not only engineered “the fall of their serious rivals”, but then perfectly orchestrated the AIG debacle? And did they do all this just to reclaim $13bb owed to them by AIG? I was confused by that part.

One point of clarification, by the way. The Fed doesn’t “give” money away, they lend it. And not just to Goldman, but to thousands of financial institutions big and small across the country.

Posted by alvin | Report as abusive

since when is 245 vs 145 infinite? I know VaR is an imperfect meaure but it is better than lazy genralisation.

Posted by JMLaredo | Report as abusive

Compare the profitability of the GSAM vs. MSAM business.
Investment banking advisory was on an absolute basis more profitable — league tables are meaningless.
The point is that GS will emphasize its core strengths when its appropriate to emphasize but now — when its a trading environment they took advantage of it. DOnt allow mediocre results to be hidden by different business model arguments.

Posted by LowRent | Report as abusive