Commentaries

Why the Gorman news isn’t big news

I’m still trying to figure out why much of the financial press seems to think the announcement that James Gorman will replace John Mack as CEO at Morgan Stanley is some shocking event. It would have been a big shock if Gorman didn’t get the job.

Sure, Morgan Stanley had to go through the obligatory search process. And there was always a chance someone other than Gorman would replace Mack.

But Mack brought Gorman into Morgan Stanley to be his heir apparent. And it seemed pretty clear he would be next line after he was appointed to oversee the integration of Morgan Stanley’s joint venture with Smith Barney.

In any event, here’s me talking about the changing of the guard at Morgan Stanley on Reuter’s Insider–our version of online TV.

Bye bye Mack

John Mack is making way for a changing of the guard at Morgan Stanley.

The Wall Street firm says Mack is stepping aside as CEO at year’s end to make way for James Gorman, long seen by many on Wall Street as Mack’s heir apparent.

Mack will remain as chairman.

The move is not surprising. The past year, of course, has been a grueling one for Mack and Morgan Stanley. But his energy level has been running on low and it’s clearly time for a new direction at the firm.

Moving-up Gorman, currently Morgan Stanley’s co-president, to CEO makes sense given the firm’s renewed commitment to more traditional lines of investment banking–including retail brokerage. In the wake of the financial crisis, Morgan Stanley has decided to take less risk in trading than some of its peers–most notably Goldman Sachs.

Morgan Stanley has rebounded from the crisis more slowly than Goldman and JPMorgan Chase because of its decision not to get back heavily into proprietary trading. Analysts have been critical of Mack’s decision to play it safe and it remains to be seen whether the 51-year-old Gorman will reverse that trend to better compete with Goldman.

But given Gorman’s long history of working in wealth management, it’s unlikey he will be quick to turn Morgan Stanley into a hot-bed of trading. And he’d be smart to stick to that plan–as there could be a demand from wealthy investors for savvy investment advice in the coming years.

Mack is no Blankfein, thankfully

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.