(AP Photo)
Morgan Stanley CEO James Gorman.
Morgan Stanley is set to make deep cuts to a key trading division — and investors are trying to figure out what's going on.
News broke last week that the banking titan would cut its fixed income, currencies, and commodities (FICC) staff by a quarter before the end of the year.
Bond-trading revenue was down 42% year-on-year at Morgan Stanley in the third quarter. FICC revenue was weak across Wall Street, but the Morgan Stanley decline was especially pronounced.
UBS analyst Brennan Hawken thinks the FICC cut could be good for Morgan Stanley. He estimates that it could boost the firm's return on equity by as much as 125 basis points.
But there are a few big questions on investors' minds, according to Hawken. He said he hopes the questions will be answered in January, when the firm reports fourth-quarter earnings and is expected to provide a strategic update.
Hawken walked us through some of the important questions.
Will Morgan Stanley be left chasing after its competitors if FICC business picks up again?
Some investors worry that Morgan Stanley will be unprepared if bond-trading activity starts to pick up again after it cuts down its FICC division.
It wouldn't be the first time the firm has had to play catch-up. In the late 1990s and early 2000s, Morgan Stanley sat out while most of Wall Street charged into the fixed income business. It was not until after John Mack replaced Phil Purcell as CEO in 2005 that Morgan Stanley finally joined the FICC party and loaded its balance sheet with risk.
Then, the financial crisis hit and Morgan Stanley had to pull back from the fixed-income business. Most banks began taking down positions and laying off staff, but those that did stay in the game, namely JPMorgan and Goldman Sachs, profited hugely during a sharp rebound in activity.
(Morgan Stanley)
Ted Pick is Morgan Stanley's new head of trading.
Seeing that, Morgan Stanley reinvested in the FICC space in late 2009 and early 2010, again hiring new bond traders to rebuild the business — just as the rebound proved to be short-lived.
Now the firm is planning to cut back in FICC again, and some investors are worried that history could repeat itself.
What about the Ted Pick factor?
Another question on investors' minds, according to Hawken, is what Ted Pick's impact will be on the trading division.
Edward "Ted" Pick was promoted to head of the entire trading division in October. Previously, he had been running equities trading.
Pick is thought to be smart, shrewd, and hard-nosed.
"He's very well-respected, but he is a numbers guy," Hawken said.