Unstructured Finance

At the Goldman Sachs investor conference on Tuesday, Morgan Stanley wealth management executive Greg Fleming ran through his 31 slides like a financially savvy drill sergeant, with a full discussion of margins, lending, technology, "value propositions" and "illustrative solutions."

But in the Q&A session, he was asked an unusually thoughtful question by an audience member: What about the brand, and the culture, of Morgan Stanley Wealth Management?

As Morgan Stanley has taken control and increased ownership of the Smith Barney retail brokerage from Citigroup, legacy Smith Barney brokers have often complained about what's happening to the culture. Morgan Stanley is all about numbers and metrics, they say, expecting brokers and managers to constantly do more with less.

Morgan Stanley has fired hundreds of underperforming brokers who, under previous standards, were performing just fine. It also got rid of duplicative managers and lots of back office and administrative staff, as Fleming sought to chop $300 million off its annual expense bill. Adviser headcount is down 7 percent over the past three years, while other staff has been cut by 15 percent.

A new technology system that rolled out this year also has a feature to track broker activity, including the data and research they use, so that Morgan Stanley can monitor productivity and cut subscriptions for services that aren't in high demand.

The following is a contribution from our chief Federal Reserve reporter, who is out in the field  at The Economist magazine’s annual economics conference:

By Jonathan Spicer

What is the most overvalued asset across the world’s advanced economies? Vincent Reinhart, the chief U.S. economist at Morgan Stanley, posed that rhetorical question on Thursday at one of New York’s signature economics conferences. After a pause: “The answer is, voters’ expectation of the net present value of the entitlements they … are expecting. Why? Because they by and large don’t have a tax system to support that,” Reinhart said.

It was a cold shot of reality as the United States roars toward the so-called “fiscal cliff” on Jan. 1, when a series of automatic tax rises and spending cuts will take hold and seriously damage the economy – unless lawmakers step in to prevent them. Most economists and investors are still betting the worst of the cliff will be avoided, probably by putting off tough questions on tax reform and longer-term government spending. That means Congress kicking the can down the road – yet again – on finally setting a plan to meaningfully reduce the massive U.S. debt after three straight years of budget deficits topping $1 trillion.

It was a good third quarter for Wall Street profits and an even better one for employees: Goldman Sachs and Morgan Stanley set aside another $7.6 billion in compensation during the period, with year-to-date pay for the average employee up 15 percent at Goldman and 3 percent at Morgan Stanley.

Total comp accruals for both firms so far this year are up to $23 billion, 2 percent higher than the amount set aside a year ago. That equates to or 47 percent of adjusted net revenue, down from 50 percent for the first nine months of 2011, but still much higher than the pay levels some shareholders are demanding.

The data are a little befuddling, since New York State Comptroller Thomas DiNapoli recently said he expects Wall Street to lose jobs this year, and for pay to drop. Recruiters and Wall Street pay consultants have also said they expect pay to either decline or remain relatively flat for many kinds of traders and bankers this year. And JPMorgan’s investment bank has already started chopping down banker pay.