Can Morgan Stanley's CEO build a better bank?

0:05Pushkin. Wall Street banks are all singing from the same hymnal. Integration is the order of the day, bringing their various divisions closer and closer together. Can this possibly be a good thing? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from my bedroom on a day the trains weren't running to the office. And coming to me from his bedroom is Josh Franklin, the U.S. banking editor for the FT. Josh, welcome to the show. Thanks very much for having me. Hi, Rob. Every one of these banks has a one bank strategy. It's one Morgan Stanley.

0:56It's one BlackRock. It's Goldman Sachs. I don't know if it's one for them, but it's something unitary. And it's just like every single bank, their big strategic priority is integration. Why is this? You know, there are no new strategies on Wall Street, only new CEOs. So just to back up, the reason we're talking about this now is Morgan Stanley has a new CEO, a guy called Ted Pick, took over from James Gorman on January 1st. And one of the big things that he's been getting across in his first six months or so on the job is that he wants to get Morgan Stanley to really run better together. And he's doing this under the slogan of the integrated firm.

1:38He had his first letter to shareholders a few months ago where he used this term about a dozen times. And this is really one of his big mantras that he's been eager to get across. And I feel like the reason why every bank leader wants to do this is because it just makes so much sense not to at least try, right? All these banks are so big. They have so many interactions with so many clients that they could pitch products to. You're just leaving money on the table if you don't try to make something like this work. But the reason why, you know, a company as old as Morgan Stanley has had as many CEOs as it has had is still kind of, you know, launching a new initiative to try to do something like this after all this time is because it's really, really hard to do.

2:20John Mack, who was the CEO a decade or two ago, was talking about this same thing, wasn't he? No, exactly. All the way back in the 1990s, the slogan for his integration effort was the one firm firm. So this really is something that's been happening for a very, very long time trying to make this thing work. But if you think about corporations in general, I mean, it's always this kind of wishy-washy thing, especially for reporters, it's like very hard to nail down. But culture does matter to an extent. And especially a lot of these Wall Street firms are the combination of multiple companies being stitched together.

2:55And Morgan Stanley is a great example of that. I mean, you've got investment banking and trading, but then you also have the old Morgan Stanley, Dean Witter. You've got Smith Barney that they bought 15 years ago. You've got E-Trade. You've got Eaton Vance. And so it's very, very hard to kind of make all of these things into one company. Let's talk for a second about potential conflicts. So I think of Morgan Stanley most broadly as two basic businesses. There's an investment bank. So they run IPOs and raise money for firms and trade and so forth. And then there's a wealth management business. Why is it so hard?

3:32Just have the wealth managers manage rich people's money and have the investment bankers do investment banker things and just get on with it. I mean, I know they've done acquisitions over the years and there's different bits and pieces. But what are the kind of practical conflicts you get into? Well, so let's have a basic example. If you can you can keep them pretty separate and let them run on their own, which is fine. But then, you know, let's say you have a rich client. Let's say you're Morgan Stanley and you have a rich client who's taking their company public. selling their company to a private equity firm.

4:02And Goldman Sachs gets that sell-side mandate or his lead left on the IPO. It's like, when Morgan Stanley had such a close relationship with that millionaire, soon to be maybe billionaire, why wouldn't they want to try to do that deal as well? The issue is, if you're the financial advisor for this client, you've known him for decades, do you want to take the risk to put him in the room with one of your investment banking colleagues who maybe is going to make a bad impression, who's maybe going to damage Morgan Stanley in the eyes of the client? So I think it's a big thing, and this is something I've heard that across all the banks, and especially Morgan Stanley, it's kind of making – first thing is just kind of building that trust that the kind of offering of the bank is kind of – the standards are the same across the different businesses.

4:46And that takes time to create. And then obviously, at the end of the day, and you know this as well as anyone, Rob, people are going to act in a way that they are incentivized to act. Correct. A lot of these programs, it's typically like a lot of sloganeering. And obviously, you know, you can say on the one hand, you know, what's good for Morgan Stanley is good for you because you're all shareholders in this company. But it's not going to improve your bonus at the end of the year. Are you really going to take time out of your effort to think of your colleagues in the other parts of the bank? And so are they – that's a very good point.

5:16Are they structuring compensation packages in such a way that they will have reason that, you know, investment bankers and wealth managers are not going to necessarily do things because they are a nice person? They're going to do it because they are paid to do it. So are they paying them to do it? So the answer is yes, but I mean, like part of your bonus can be influenced on the upside. if you're seen as being like a good corporate citizen who like, you know, is referring business and doing well, but it's highly discretionary, typically anyway, and most of these banks. So it's not exactly, it's not like a, you know, I brought in like a$50 million investment banking fee.

5:56And so I'm going to get a fixed piece of that. So that just kind of adds another layer of complexity, or it's like, okay, well, if I spend time on this, will I really be rewarded the way I think I should be? There are some banks that have, so Goldman Sachs, for instance, I've reported, they've explored at least the idea of paying like a formulaic bonus for business that's referred to the private bank from the investment bank. But they haven't done that yet. And I think that there's still a feeling of like, you know, that's if you're a bank like this, is that really the, you know, is an incentive like that needed?

6:26Or is it more just about kind of creating the right culture at these places? And of course, Morgan Stanley, by the standards of Wall Street banks, is actually not that complex a bank. You might have a bank that has a retail bank, that has a commercial bank, investment banking, wealth management. There might be a payments business. There's credit cards. So there's other Wall Street banks that must be dealing with this. You know, you're fighting over capital allocation or whatever else, or salaries or executives or talent or whatever, across five divisions or six. I can only imagine the situation there is worse.

7:05No, exactly. I mean, I've written about quite a high-profile example at a bank like JPMorgan Chase, which is obviously the biggest U.S. bank, made almost$50 billion in profits last year, hugely successful by almost any metric. But even they find this stuff tough. I mean, they have different divisions, different businesses that offer the same products to the same clients. And they sometimes find themselves competing with each other internally for that. And I wrote about one case a couple of years ago where you had one financial advisor at one part of the bank and felt like they were in competition with private bankers in another part of the bank and over who got to manage the money of a very high-profile U.S.

7:45athlete, a guy called Alex Rodriguez. Kind of spilled out into court filings, and it just shows just how hard it is when you're as big as a lot of these firms are to really get everyone singing from the same hymn sheet. Just on the flip side of what we're discussing, Josh, a lot of effort goes in to keeping different parts of banks separate, separating different divisions, investment banking from research, for example. There is issues of conflict of interest that separation supports. So at the same time as banks are trying to integrate, isn't there also an issue of keeping the parts far enough distant?

8:29Totally right. And I think that's where it's like, you know, one Goldman Sachs or the integrated firm, it's like a slight misnomer to an extent, because to your point, like partly for regulatory reasons, these things need to sometimes be kept at arm's length from each other. So it's like, it adds another layer of like, you know, how you actually make this work. And then also it just kind of goes back to the lifeblood for these firms is the clients wanting to do business with them. And, you know, cross-selling can be seen as like a pretty grubby thing where it's like, you know, you're kind of talking up your own book and kind of peddling your own products to clients, do clients think, okay, well, what can I trust?

9:06You need to do this in a way that makes me feel like I can still trust your advice, that it's not kind of, you know, you're not conflicted just because you're, you know, pitching your own stuff to me. Yeah. It's interesting you used the example of A-Rod and J.P. Morgan earlier with the trouble those relationships ended up in. but JP Morgan is held out as the shining example of the diversified bank that really works. It has a great retail business, a great commercial bank, has a great investment bank, has a big wealth management organization that has a great payments business. And Jamie Dimon, the CEO, is the sun king of Wall Street, and it all works and they make loads of money.

9:51Have they kind of nailed it in some way, or at least in relative terms. Yeah, and I think what makes it even more impressive, it goes back to what I said earlier about one of the things that makes it even harder is the fact that these firms are often different companies stitched together. And, you know, JP Morgan has been one of the more acquisitive big US banks in the last, you know, 20, 25 years. So you've got a bunch of different companies under the hood there. And I think they've kind of benefited in a lot of ways in terms of, you know, they've had a very clear strategy. Jamie Dimon does get a lot of credit.

10:22But also, they've just had, you know, a number of their competitors have had missteps that they've managed to avoid, by and large, at J.P. Morgan. So they've really been able to pounce. But I think they kind of are looked at as one of the gold standards for kind of making this thing work. On the other end of the spectrum, the phrase that still sends chills down analysts' spine is financial supermarket, which was a phrase first used by Sandy Weil when he was putting together the massive financial conglomerate that was Citigroup. And, you know, oddly, he is Jamie Dimon's mentor. But the Citibank financial supermarket has been a disaster.

11:11And, you know, they built this thing and it was insurance and it was banking and it was retail and it was commercial and it was investment banking. And people have been trying to fix that weird portmanteau, if that's the right word, kind of colossus for almost 30 years now. So what does J.P. Morgan get right if they're getting it right? And what went so badly wrong with the Citibank integration? Do we have an idea? Yeah. So I think one of the things that made the Citi experience so hard was the fact that they tried to do it on such a global scale. I mean, if you look at Citi, they have so many banking licenses all around the world.

11:54And that just means you have so many different regulated entities. You have so many different regulators you need to answer to. And I mean, I don't know how many listeners have, you know, bank accounts in multiple countries, even if it's with the same bank. It's when you have subsidiaries in different countries, it's almost like you're kind of dealing with two separate banks, even if they're kind of the same brand. So this is such a heavily regulated industry. It's very hard to make it all fit together if you're trying to do a lot cross-border as well. Obviously, all these banks are global, but Citi's structure is particularly complicated in terms of how they were trying to make it work.

12:30There's an exception to this, though, right? So you're absolutely right that J.P. Morgan has focused very heavily domestically in its retail and its commercial and its wealth management operations. But investment banking does seem to be a business that travels. The big investment banks, you know, they have headquarters in New York and London and Hong Kong or Tokyo and so forth. Why does that business work a little better as a global business where the other forms that banking takes just haven't? I mean, I think it's always easier for a start when you're not dealing with customer deposits like you do with traditional investment banking and underwriting and things.

13:08You know, and there it's kind of, you have a lot more kind of global customers. If you are a big global bank yourself and you have global customers, it kind of helps to reflect that. As a final question, Josh, why bother? If integrating these large banks is so hard that a smarter group of people as Morgan Stanley is still trying to do it 25 years later, why not just break them up? Why have the wealth management business and the investment banking business and the retail business all in one shop? Why not just have separate companies? They do different things. I think just because something is hard doesn't mean that you don't need to try to do it.

13:51Yeah. And at the end of the day, I mean, so if you look at the Morgan Stanley example, you know, your TED pick, he took over CEO in January. What did he inherit? He inherited a business that made$9 billion in profits last year and a strategy that investors fundamentally really like, you know, being a leading wealth asset manager, investment bank, and trading firm. And investors like that strategy, and there's a big emphasis on the wealth management side that investors are particularly keen on. So why not try to kind of fine-tune the machine that you've inherited? And I think that's one of the things that Ted Pick's trying to do.

14:27You don't need to reinvent the wheel. You just need to kind of smooth it out to make sure it kind of rolls better. Here at the Unhedged Podcast, we are always trying to fine-tune things. After a short break, we will fine-tune long and short.

14:48Welcome back. This is long, short, that portion of the show where we go long things we like and short things we don't like. I am short the U.S. housing market. Over the last week, we've seen a bunch of bad news about home sales falling, inventories of new homes rising, the existing home market slowing down. All of this would indicate that home prices will soon be falling and give American homebuyers a break. But it's not happening. The only thing that's going up in the U.S. housing market is prices. It's really the worst market in the world. Josh, you have a long or a short for us? I'm short summer in New York at the moment.

15:32Maybe this is just my body still adjusting to the sweltering heat that we get this time of year and just baking alive, waiting on subway platforms. We have that kind of brief period in kind of spring and autumn in New York where the weather is just perfect, and now we're just kind of like, feel like roasting alive slowly. Josh, you have to learn to love the smell of hot garbage. if you are ever going to be a real New Yorker. I, you know, it's totally right. I need to embrace it. On that mildly disgusting note, listeners, Unhedged will be off next week. We'll be back the following week. Unhedged is produced by Jake Harper and edited by Bryant Erstat.

16:14Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

16:53We'll be right back.