Monday, April 16, 2012

Will James Gorman and Morgan Stanley be the first to adopt ultra transparency?

In his Bloomberg column, William Cohan makes the case that unlike other Wall Street CEOs, Morgan Stanley's James Gorman realizes that its time to move away from proprietary trading and to focus on helping clients solve their problems.

If true, it sounds like Morgan Stanley is a likely organization to be the first to adopt ultra transparency.  By disclosing its current asset, liability and off-balance sheet exposure details, Morgan Stanley is showing its clients that it is not trading against them.

As Mr. Cohan said

There has been a noticeable dearth of leadership on Wall Street after the financial crisis. 
Where are the senior executives willing to explain to the American people how and why the financial industry’s behavior got our economy into so much trouble and why that behavior needs to change if there is to be any hope of restoring the public’s confidence in our capital markets? Without that restored faith, you can pretty much forget about any economic recovery anytime soon. 
Instead of rising to the occasion, Wall Street’s purported top rung -- Lloyd Blankfein, the chief executive officer of Goldman Sachs Group Inc. (GS); and Jamie Dimon, CEO of JPMorgan Chase & Co. (JPM) -- have been too busy either defending their own indefensible actions leading up to the crisis (Blankfein) or complaining about how new regulations are impeding profitability (Dimon) to give any thought to fundamentally changing the way Wall Street does business. So far, they have shown the opposite of leadership: blatant self-interest. 
Fortunately, as Aristotle taught us, nature abhors a vacuum. And into the leadership breach has quietly stepped the Australian-born James Gorman, the 53-year-old former McKinsey & Co. consultant and Merrill Lynch & Co. executive who has been the CEO of Morgan Stanley since 2010 and both chairman and CEO since the beginning of the year. In his unassuming way, Gorman has come out swinging.... 
Unlike Blankfein and Dimon, Gorman understands that true leadership means perceiving the world as it really is -- and dealing with it -- not wishing it were something that it no longer is.... 
He said it was essential for Morgan Stanley (MS) to get back to helping its clients solve their problems, rather than focusing on ways to make a big financial score.... 
He said the days of proprietary trading are over at Morgan Stanley. “That was sort of a stray off the reservation,” he said, adding that while a number of firms made a bunch of money trading for their own account, “Morgan Stanley had always made money serving its clients. That was our reason to be. That was at the core, as I said, of the DNA.”
While he didn’t mention Howard L. Hubler, a Morgan Stanley trader who was blamed for a $9 billion loss on an ill-timed proprietary trade in 2007, Gorman conceded: “We got envious. A lot of firms got envious. And it’s the problem with corporate strategy. You’ve got to stick to what you’re good at. Just because somebody else is good at it doesn’t mean you’re going to be good at it. And we started trying to be what somebody else was good at.” 
He said it was time to accept greater regulation that will either prevent firms from engaging in proprietary trading or require them to hold so much capital in reserve as to make this activity economically unattractive.
Ultra transparency eliminates the need for either greater regulation or higher capital reserves.

With ultra transparency, market participants can exert discipline in the form of higher costs of funds as the risk of the bank increases.  The higher cost of funding acts as a break on risk taking.
He said he is a believer in a steadier stream of consistent earnings. 
“What investors want ultimately is certainty,” he said. “They want to know the strategy you’re on. Why it is that you’re going to succeed on it and they want to see consistent returns. In the proprietary-trading businesses, they’re very volatile. And investors discount it because they don’t know if you can repeat it the next quarter.”...
Ultra transparency is consistent with providing investors with certainty.  With ultra transparency, investors can truly see how much risk is being taken in the business strategy to achieve the returns.
One thing has become abundantly clear on Wall Street: Its customers and its counterparties are sick and tired of being gamed, and the firm -- or firms -- that first restores the trust that has been lost will be the most successful in the future.
As this blog has said repeatedly, the only way to restore trust is to provide ultra transparency.  That is the only way the customers and counter-parties can verify that they are not being gamed.

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