Morgan Stanley’s risk taking

By Felix Salmon
July 22, 2009

The NYT’s Graham Bowley comes out and says it in his report on Morgan Stanley’s weak earnings today:

The results were in sharp contrast to rivals Goldman Sachs and JPMorgan Chase, which both reported strong second-quarter profits last week. Those two banks in particular have rebounded more quickly, mostly by taking on more risk in trading for themselves and their customers. But Morgan Stanley, which was burned more severely by the crisis, has moved to reduce its risk taking and try to build a stable, less volatile firm.

While analysts say the approach may pay off in the long run, for now Morgan’s losses are raising questions about the strategy being pursued by its chief executive, John J. Mack.

This seems clear: Goldman Sachs is making money because it’s “taking on more risk”; Morgan Stanley is losing money because it “has moved to reduce its risk taking”. What’s more, anonymous analysts seem to think that the take-less-risk approach is a good idea.

But:

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Clearly there are limits to reducing risk-taking. And if you use the purest indicator of risk-taking that Morgan Stanley reports quarterly, it’s going up, quite fast, not down. (From $105 million to $154 million in five quarters is a 36% annualized growth rate.)

So how come Morgan Stanley is so weak while Goldman Sachs is so strong? It’s very unclear to me.

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