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Exclusive: Morgan Stanley commodities staff spooked by CEO comment

Published 31/10/2014, 14:32
© Reuters Morgan Stanley Chairman and CEO Gorman speaks during the Institute of International Finance Annual Meeting in Washington
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By Lauren Tara LaCapra

NEW YORK (Reuters) - During Morgan Stanley's (N:MS) public earnings call earlier this month, Chief Executive James Gorman made a remark that hit his commodities staff like a bombshell: the bank plans to further "optimise" its business of owning and trading stuff like oil, natural gas, electricity and metals.

So this past Monday, when co-head of the commodities business Simon Greenshields held a meeting for senior staff, he was met with a barrage of questions from colleagues who hadn't been told about the plans either before or after the call, people familiar with the situation said. They wanted to know what Gorman meant by "optimise."

    Greenshields dodged questions about management's plans and told participants to take the comments at "face value," instead highlighting areas where the business is growing. After several minutes of discussion, Greenshields ended the meeting, the sources said.

Whatever Gorman meant by "optimise," the commodities staff interpreted it as "not good for my career at Morgan Stanley." According to KBW analyst Brian Kleinhanzl, who rates Morgan Stanley a "market perform," optimise means "cutting people or exiting products altogether that are unprofitable."

Greenshields did not respond to requests for comment.

"As we have previously stated, Morgan Stanley is committed to a commodities business that services the supply and risk management needs of our clients across the oil, power and gas, and metal sectors, in line with the evolving market and regulatory environment," spokesman Mark Lake said.

Gorman's remarks and the reaction from employees come amid a rocky period for the commodities business on Wall Street. Banks that own, transport and store hard commodities have come under intense regulatory scrutiny and political pressure to exit those businesses.

    But unlike arch rival Goldman Sachs Group Inc (N:GS), which regards commodities as a core trading activity, Morgan Stanley is busy trying to jettison big chunks of the business.

    Morgan Stanley has already sold Transmontaigne, an oil terminals and pipeline operator. It has also been trying for almost a year to sell another physical oil business to Russian oil giant Rosneft (UL:ROSNG), but that deal is now threatened by U.S. sanctions. The bank plans to pursue alternatives if the deal doesn't close by year-end.

   In the meantime, though, the pullback has left dozens of commodities employees in limbo - and on edge.

As Morgan Stanley was setting up plans to sell the physical oil business to Rosneft, it offered those employees retention bonuses that can be redeemed if they stay at the company through March 2015. That bonus has kept some people there through the turmoil, but some 100 front-office workers are unsure of where they will be working in a few months, now that the Rosneft deal is on ice. Some are looking for opportunities to leave Morgan Stanley sooner, even if that means they forego the bonus.

The jostling among disgruntled bankers and traders is making Morgan Stanley's retreat from some parts of commodities trading look increasingly haphazard to people both inside and outside the bank.

    One senior executive at a rival bank said it is impossible to successfully run a business full of high-powered, well-paid people who are uncertain about their future there. From the outside, this person said, Morgan Stanley's strategy is befuddling.

    From Morgan Stanley's point of view, though, there is little option but to slim down the business further, since it is not earning an adequate return on capital for shareholders, said Kleinhanzl at KBW.

    "It is a necessary business decision, given the return-on-equity in the business," he said. "It creates some near-term uncertainty, but longer-term I don't view it as a core business of the company."

    PULLBACK FROM COMMODITIES

    Morgan Stanley's recent difficulties in commodities trading come in stark contrast to its history as one of two premier Wall Street banks involved with the business, along with Goldman Sachs.

    Although the banks do not disclose income from commodities trading specifically, analysts estimate that the business delivered billions of dollars in revenue to Morgan Stanley in better years, particularly in 2007. But more recently, it has struggled under the weight of new regulations and shifting business strategy. In 2012, Morgan Stanley's commodities business reported the worst results since 1995. It has been uneven since then, according to executive comments on quarterly earnings calls.

    Goldman has faced some of the same challenges, ranging from weak client activity and a regulation preventing banks from gambling in markets with their own money, to politicians urging the bank

By Lauren Tara LaCapra

NEW YORK (Reuters) - During Morgan Stanley's (N:MS) public earnings call earlier this month, Chief Executive James Gorman made a remark that hit his commodities staff like a bombshell: the bank plans to further "optimise" its business of owning and trading stuff like oil, natural gas, electricity and metals.

So this past Monday, when co-head of the commodities business Simon Greenshields held a meeting for senior staff, he was met with a barrage of questions from colleagues who hadn't been told about the plans either before or after the call, people familiar with the situation said. They wanted to know what Gorman meant by "optimise."

    Greenshields dodged questions about management's plans and told participants to take the comments at "face value," instead highlighting areas where the business is growing. After several minutes of discussion, Greenshields ended the meeting, the sources said.

Whatever Gorman meant by "optimise," the commodities staff interpreted it as "not good for my career at Morgan Stanley." According to KBW analyst Brian Kleinhanzl, who rates Morgan Stanley a "market perform," optimise means "cutting people or exiting products altogether that are unprofitable."

Greenshields did not respond to requests for comment.

"As we have previously stated, Morgan Stanley is committed to a commodities business that services the supply and risk management needs of our clients across the oil, power and gas, and metal sectors, in line with the evolving market and regulatory environment," spokesman Mark Lake said.

Gorman's remarks and the reaction from employees come amid a rocky period for the commodities business on Wall Street. Banks that own, transport and store hard commodities have come under intense regulatory scrutiny and political pressure to exit those businesses.

    But unlike arch rival Goldman Sachs Group Inc (N:GS), which regards commodities as a core trading activity, Morgan Stanley is busy trying to jettison big chunks of the business.

    Morgan Stanley has already sold Transmontaigne, an oil terminals and pipeline operator. It has also been trying for almost a year to sell another physical oil business to Russian oil giant Rosneft (UL:ROSNG), but that deal is now threatened by U.S. sanctions. The bank plans to pursue alternatives if the deal doesn't close by year-end.

   In the meantime, though, the pullback has left dozens of commodities employees in limbo - and on edge.

As Morgan Stanley was setting up plans to sell the physical oil business to Rosneft, it offered those employees retention bonuses that can be redeemed if they stay at the company through March 2015. That bonus has kept some people there through the turmoil, but some 100 front-office workers are unsure of where they will be working in a few months, now that the Rosneft deal is on ice. Some are looking for opportunities to leave Morgan Stanley sooner, even if that means they forego the bonus.

The jostling among disgruntled bankers and traders is making Morgan Stanley's retreat from some parts of commodities trading look increasingly haphazard to people both inside and outside the bank.

    One senior executive at a rival bank said it is impossible to successfully run a business full of high-powered, well-paid people who are uncertain about their future there. From the outside, this person said, Morgan Stanley's strategy is befuddling.

    From Morgan Stanley's point of view, though, there is little option but to slim down the business further, since it is not earning an adequate return on capital for shareholders, said Kleinhanzl at KBW.

    "It is a necessary business decision, given the return-on-equity in the business," he said. "It creates some near-term uncertainty, but longer-term I don't view it as a core business of the company."

    PULLBACK FROM COMMODITIES

    Morgan Stanley's recent difficulties in commodities trading come in stark contrast to its history as one of two premier Wall Street banks involved with the business, along with Goldman Sachs.

    Although the banks do not disclose income from commodities trading specifically, analysts estimate that the business delivered billions of dollars in revenue to Morgan Stanley in better years, particularly in 2007. But more recently, it has struggled under the weight of new regulations and shifting business strategy. In 2012, Morgan Stanley's commodities business reported the worst results since 1995. It has been uneven since then, according to executive comments on quarterly earnings calls.

    Goldman has faced some of the same challenges, ranging from weak client activity and a regulation preventing banks from gambling in markets with their own money, to politicians urging the bank to sell its metal warehousing business, which it agreed to do this year.

    Yet Goldman executives have said many times that they are committed to the business, and won't exit it unless a new regulation or law requires them to. Chief Executive Lloyd Blankfein has called commodity trading "a core, strategic business" for Goldman, and Chief Operating Officer Gary Cohn and Chief Financial Officer Harvey Schwartz have made similar comments.

    Goldman may eventually have to change its stance: the Fed is examining whether it is appropriate for banks to be involved with physical commodities, and an influential Senate panel plans to hold a public hearing on the issue, which it has been investigating for over a year. But the public display of bravado has given Goldman's commodities employees more confidence in their role at the bank, at least for the near term.

    Meanwhile, Gorman has been trying to shift Morgan Stanley away from businesses that deliver volatile profits and draw regulatory scrutiny, to more stable ones that avoid the limelight.

    A big part of his plan to boost return-on-equity to at least 10 percent from a current level in the single-digits comes from getting rid of commodities assets that tie up too much capital, and reinvesting that money into more profitable pursuits, like commodities lending and derivatives.

   

    CONFUSION REIGNS

    Some insiders say there is widespread confusion and disenchantment about the strategy.

    At the same time Morgan Stanley has been pursuing the sale to Rosneft, for example, it was also laying the groundwork for a new physical trading operation that would send compressed natural gas to underserved areas in the Caribbean.

    Some people inside Morgan Stanley wondered why the project, called Wentworth Holdings LLC, was launched at all, given the Federal Reserve's concerns about banks owning those types of assets.

    After a Reuters report on Aug. 29 revealed those plans, the Fed contacted Morgan Stanley with questions about the business, prompting Gorman to order its sale.

   Greenshields began talking to potential buyers, as did two employees who were overseeing the Wentworth project day-to-day.

    Private equity firm Blackstone Group may be interested in buying or investing in the business, the sources said. A Blackstone spokesman declined to comment.

    Some sources said Greenshields and the two employees - Ryan Comerford and Alberto Chiesara - want to use the sale as an exit plan.

While Comerford and Chiesara have the connections needed to build and run the business, Greenshields wants to ensure that he is also included in any exit plan, those people said.

© Reuters. Morgan Stanley Chairman and CEO Gorman speaks during the Institute of International Finance Annual Meeting in Washington

   Comerford did not respond to requests for comment, and Chiesara declined to comment.

(Reporting by Lauren Tara LaCapra in New York; additional reporting by Greg Roumeliotis in New York; Editing by Paritosh Bansal and John Pickering)

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