Morgan Stanley has added back hundreds of jobs in its fixed-income division, which was shrunk in a pivotal 2015 restructuring that saw the bank move away from trading bonds, currencies and commodities.
James Gorman, chief executive, said he had no hesitation reinvesting in fixed income as circumstances changed. “You don’t live in a world which stays still,” he told the Financial Times. “As we saw opportunities, and a lot of our competitors retreated from the space, and we’re running a profitable business that was meeting our target threshold, we’d be stupid not to take advantage of that.”
Ted Pick, head of Morgan Stanley’s investment bank, told the Financial Times that about half of the 1,200 jobs cut five years ago had since been added back.
The fixed-income overhaul was one of Wall Street’s most celebrated post-crisis restructurings, winning Morgan Stanley praise for dealing decisively with the falling profitability of the division in a world of tougher regulation and flagging client demand.
It marked a dramatic break with the stay-the-course strategy of longtime rival Goldman Sachs, whose then-chief executive Lloyd Blankfein insisted the challenges in the fixed-income market were temporary. Goldman deferred significant restructuring until 2019 when David Solomon took over as chief executive.
Defying expectations — and predictions from rivals — that it was throwing in the towel, Morgan Stanley’s fixed-income revenues began to rise almost immediately after its decision to cut 25 per cent of the division’s resources. Average quarterly fixed-income revenues came in at $1.28bn in 2016, a touch ahead of 2015’s and comfortably better than the $1bn a quarter Morgan Stanley targeted.
The growth accelerated in recent years, culminating in record revenues of $3bn in the second quarter of 2020, a level that Mr Gorman said was driven by extraordinary market conditions and would not be repeated. The number was behind Goldman’s $4.2bn for the same quarter, but was still big enough to leave outsiders wondering how Morgan Stanley managed to grow so much after cutting so deeply.
Mr Pick said the fixed-income division had been adding staff in recent years, and had now “regrown that business by about half” of the headcount that was eliminated in 2015. The assets allocated to fixed income had also increased, Mr Pick said, though like-for-like comparisons were not possible given regulatory changes.
“Having a fixed-income business in place, with the right kind of client focus, technology kit and risk discipline, we felt we could now grow . . . the business prudently in a balanced way,” Mr Pick said, describing how technology, higher market-wide revenues and falling competition had improved the business’s economics under Sam Kellie-Smith, who took over fixed income in 2015 and led its restructuring.
Mr Gorman said the investment in fixed income “doesn’t mean you’re increasing the volatility of the business”. Still, the risk in Morgan Stanley’s overall trading book — as measured by the daily potential losses — averaged $60m in the second quarter, up 33 per cent on its level in the second quarter of 2016, partly because of increased market volatility.
Mr Pick said that aside from selling some assets like its physical commodities business, Morgan Stanley avoided leaving areas completely, instead opting to “resize” businesses to reflect tough market conditions in 2015.
“Certainly in the initial days [after the restructuring], we were doing a lot less, period, because we needed to reset and figure out what the clients want and what capability did we have,” he said.
Businesses where the bank pulled back, and where it has since reinvested, include some securitised products, including commercial and residential mortgages.
“This has not just been an aspiration to reach for revenues,” said Mr Pick, describing how business must meet return targets but also have a “durability and predictability”.