March 24, 2023

DealBook: Morgan Chief’s Pay Is Cut for 2nd Consecutive Year

After a year of mixed financial performance at Morgan Stanley, the firm’s chief executive, James P. Gorman, is expected to take a second annual pay cut.

Mr. Gorman’s compensation for last year is estimated to be slightly less than the $10.5 million he took home in 2011, according to a person briefed on the matter. His 2011 pay was down 25 percent from the previous year.

The total value of Mr. Gorman’s compensation package for 2012 is not yet known, but according to a regulatory filing on Thursday, the bank’s board awarded him stock options valued at $2.6 million, on top of his base salary of $800,000. He is expected to earn another $2.6 million in deferred cash, according to this person, who spoke on condition of anonymity because some of the compensation details are not yet public.

Morgan Stanley had to contend with challenges in 2012. On the one hand, its stock rose 26 percent to $19.12, and its fourth-quarter earnings were fairly strong, exceeding analysts’ expectations. On the other hand, it managed to produce a return on shareholder equity of only 5 percent for the year, compared to 10.7 percent at its rival Goldman Sachs. Simply to cover its debt expenses and other capital costs, Morgan Stanley needs to achieve a return on equity closer to 10 percent.

While the firm has made progress in building out its wealth management operation, its fixed-income department, which was badly bruised during the financial crisis, continues to struggle. These issues, according to the person briefed on the matter, played a role in the board’s decision to cut Mr. Gorman’s pay.

The stock options Mr. Gorman was awarded give him the right to buy Morgan Stanley shares in the future at a preset price. But the options will be worthless if the company’s shares fell below that price. In previous years, Mr. Gorman had been granted restricted stock units, which are stock grants tied to the price of the firm’s shares when they vest down the road.

The board decided to grant options rather than restricted stock in 2012 because Morgan Stanley failed to meet the performance criteria set out in a 2001 shareholder resolution that would have allowed it to qualify for full corporate tax deductibility. One reason it failed to meet the conditions was an accounting charge that created huge volatility in its earnings but did not reflect its underlying performance. As a result, the company reported a loss of $117 million for last year. Excluding that charge, its profit was roughly $3 billion.

Mr. Gorman was not the only Wall Street chief to see his pay fall. JPMorgan Chase announced last week that its board was cutting in half the 2012 pay of its chief executive, Jamie Dimon, to $11.5 million, after the bank suffered an embarrassing $6 billion trading loss last year on his watch.

In contrast, Goldman’s chief executive, Lloyd C. Blankfein, is on track to get a raise. Last week, he was granted restricted stock valued at $13.3 million for 2012, nearly double his stock award the previous year. That was on top of a base salary of $2 million. Goldman has not yet revealed the size of Mr. Blankfein’s cash bonus.

Other top executives at Morgan Stanley are also expected to see their pay drop somewhat, according to the person briefed on the matter. Gregory J. Fleming, who leads the firm’s wealth management division, was granted stock options valued at $2.4 million, as was Colm Kelleher, who runs institutional securities. Their total compensation packages are not known, but the person briefed on the matter said their pay would be down from the previous year.

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DealBook: Goldman’s Earnings Fell 12% in 2nd Quarter

Lloyd C. Blankfein, the chief of Goldman Sachs, spoke at an economic forum in St. Petersburg, Russia, in June.Andrey Rudakov/Bloomberg NewsLloyd C. Blankfein, the chief of Goldman Sachs, spoke at an economic forum in St. Petersburg, Russia, in June.

Goldman Sachs is facing even more pressure to improve its earnings in the face of a moribund economy.

Goldman said Tuesday that its second-quarter profit fell 12 percent, to $927 million as it and other Wall Street banks have grappled with both a weak market conditions and the continuing European fiscal crisis that have made investment banking and trading less profitable.

Goldman’s profit amounted to $1.78 a share and beat the average analyst estimate of $1.16 a share, according to Thomson Reuters.

But on other important measures, the firm’s results were more disappointing. Its return on equity, a common measure of profitability, tumbled to 5.4 percent, down from 12.2 percent in the first quarter.

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The firm’s revenue as a whole fell 9 percent from a year ago, to $6.6 billion.

And while revenue in the bank’s core bond trading business rose 37 percent from the period a year ago, to $2.2 billion, it slipped significantly from the first quarter this year. Revenue from other operations, including advising companies on takeovers and stock and debt offerings, declined on both an annual and a quarterly basis.

Goldman executives conceded that they continue to face a difficult environment, one in which the firm will have to fight to produce satisfactory profits.

“While we’re trying to pare down and perform as well as we can in this difficult environment, these aren’t returns that are acceptable to us or to our shareholders, and we know that,” David Viniar, Goldman’s chief financial officer, said on a conference call with analysts.

Shares in Goldman rose slightly on Tuesday, to $93.98. They have fallen 24.7 percent over the last 12 months.

Trading in bonds, currencies and commodities, the fuel for Goldman’s eye-popping profits until recent years, has been battered by tough markets. The firm reported on Tuesday that its average daily value at risk, a rough estimate of how much money it could lose on a difficult trading trading, had fallen for a second straight quarter, to $92 million.

And while Goldman again led other competitors in advising companies on mergers and acquisitions, the economic uncertainty has sapped clients’ appetite for bold and transformative deals.

Banks are also contending with an array of new regulations aimed at reducing risk but also profitability, including higher capital requirements and the banning of some trading done on a firm’s own behalf.

Last month, Goldman, along with 14 other big banks, received a blow to its credit rating by Moody’s Investors Service that signaled continuing weakness within the financial industry. Moody’s cut Goldman’s rating by two notches, to A3, still higher than the ratings of many of its rivals.

One response has been to cut expenses. Goldman said on Tuesday that it was in the process of “implementing additional expense reduction initiatives.” As of June 30, the firm had 32,300 employees, down 9 percent from a year ago.

And its operating expenses for the quarter were $5.2 billion, down 8 percent from the year-ago period and 23 percent from the first quarter.

Another move has been to search for other sources of revenue, including by extending more loans to wealthy customers and corporations from the firm’s private bank.

“I think we’ll continue to do the best we can with our clients, manage our expenses and manage our capital,” Mr. Viniar said on the call.

“But I would not expect that we’re not going to have acceptable R.O.E.’s in a macro environment like this,” he added, referring to return on equity.

Still, some frustration has set in, especially on issues like compensation. Goldman cut the amount of money it set aside for executive pay by 9 percent for the quarter, to $2.9 billion. But for the first half of this year, compensation represented about 44 percent of the firm’s total revenue.

Steve Wharton, an analyst at JPMorgan Chase’s asset management arm, asked Mr. Viniar during the conference call why Goldman’s compensation ratio was not lower — perhaps somewhere in the 30 percent range — given the lower profitability of the firm.

Mr. Viniar responded that simply cutting pay would not necessarily solve the firm’s problems and could lead to some top producers choosing to move to other banks or to hedge funds.

“We could cut comp very dramatically in one year and it would help our returns, but we live in a competitive environment,” he said.

Goldman said on Tuesday that its institutional clients services business, which encompasses trading, was up 11 percent percent from the year-ago period. While fixed-income trading improved from the same time last year, equity trading and commissions both declined sharply.

Investment banking revenues fell 17 percent, to $1.2 billion, marred by a 37 decline in equity underwriting as many companies pulled back from selling stock during the quarter. Financial advisory revenues, which includes deal-making, fell 26 percent.

Revenues in Goldman’s investing and lending arm tumbled 81 percent from the same time last year, as investments in businesses like the Industrial and Commercial Bank of China declined in value.

Investment management, which oversees money for wealthy clients, posted a 5 percent gain in revenues for the quarter because as higher incentive fees offset lower management fees.

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DealBook: UBS Outlines How It Plans to Carry Out Turnaround

Sergio P. Ermotti joined UBS in April from the Italian bank UniCredit.Stefano Rellandini/ReutersSergio P. Ermotti joined UBS in April from the Italian bank UniCredit.

When Sergio P. Ermotti entered the chandelier-drenched ballroom at the Waldorf Astoria hotel in Manhattan for his first investor day at UBS as chief executive, he started choking on a piece of food, prompting a few attendees to joke that he may have bitten off more than he can chew in taking the top spot at the beleaguered Swiss bank.

As he took to the stage, a more composed Mr. Ermotti outlined the much-anticipated turnaround strategy for the firm, which in recent months has weathered the European debt crisis, global market turmoil and a trading scandal that prompted the resignation of his predecessor and dented employee morale.

In his speech on Thursday, Mr. Ermotti, 51, promised to shrink weak business units and to continue bolstering the bank’s capital levels. He is also aiming to increase the firm’s return on equity — a main measure of profitability — by several percentage points.

“We know these goals are ambitious, but we think they are achievable,” he told the crowded room made up of largely analysts and reporters. “Everyone will judge the success of our strategy by our ability to execute.”

UBS has endured a turbulent few years.

After becoming Europe’s biggest banking casualty during the subprime drama, UBS had to be bailed out by the Swiss National Bank in 2008. The financial firm had slowly started to restore credibility and profits when the sovereign debt crisis hit, hurting business and prompting layoffs.

Then in September, a rogue trading scandal cost the firm more than $2 billion and raised serious questions about its internal risk controls. In the wake of the scandal, Oswald J. Grübel, the chief executive who was expected to revive UBS with a plan for a slimmer but more profitable bank, resigned. Kweku M. Adoboli, the former trader who has been charged with fraud and false accounting for the trades, has yet to enter a plea and faces a court hearing in London next week.

Now it is up to Mr. Ermotti, who joined UBS in April and was named chief executive on Tuesday, to convince clients and employees that the difficult times are behind.

While Mr. Ermotti declined to comment on the trading scandal at the event, he and other senior executives promised a return to the basics. They outlined plans to exit risky businesses like equity proprietary trading, where the firm makes bets with its own capital. It is also in the process of scaling back the investment bank.

Instead, the bank will focus on areas like leveraged finance and corporate lending that offer the potential for good returns with less risk. Mr. Ermotti singled out the firm’s wealth management division, telling investors it was not for sale.

The bank will also continue to cut the work force. In August it announced plans to cut 3,500 jobs and said Thursday it would eliminate 400 more positions in the months to come.

But some analysts said Mr. Ermotti, who cut his teeth on Wall Street working at Merrill Lynch, faced a daunting challenge in revamping UBS at a time when the industry was streamlining and coping with stricter capital rules. Credit Suisse, a rival whose investment banking unit has been performing better, has laid out a similar strategy to UBS, raising doubts about how the banks will be able to share the shrinking demand for services and products.

Some analysts have urged more radical options for UBS. Kian Abouhossein at JPMorgan Chase wrote this month that UBS and Credit Suisse could combine their investment banking operations, a step that could create a top-five player by revenue.

On Wednesday, a former UBS chairman, Peter Kurer, who left the bank in 2009, suggested that UBS and Credit Suisse should split their investment banking businesses from the rest of the banks to satisfy shareholders.

“There are few who believe in a great future for investment banks; hardly anyone thinks that Swiss universal banks are good at running integrated investment banks,” Mr. Kurer wrote in a commentary for Bloomberg News on Wednesday.

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DealBook: Morgan Stanley Posts $2.15 Billion Profit

Morgan StanleyMary Altaffer/Associated PressJames P. Gorman, Morgan Stanley’s chief executive, said the firm “effectively navigated turbulent markets” in the quarter.

Morgan Stanley, buoyed by solid performances in its core divisions and a huge one-time accounting gain, announced third-quarter earnings of $2.15 billion, compared with a loss of $91 million a year ago.

The company’s profit of $1.16 a share handily beat analyst predictions of 30 cents a share, according to Thomson Reuters. In contrast, Goldman Sachs, weighed down by losses on its investments in its own account, reported a loss of $428 million on Tuesday, compared with a $1.7 billion profit a year ago.

Excluding the accounting gain Morgan Stanley notched earnings of three cents a share. Analysts had been forecasting an 11 cent loss.

James P. Gorman, Morgan Stanley’s chief executive, said the firm “effectively navigated turbulent markets” in the quarter.

Morgan Stanley Smith Barney, the firm’s global wealth management division, continued to be a steady performer, posting net revenue of $3.26 billion this quarter, compared with $3.1 billion in the year-ago period. Still, the business got hit by the market turmoil, even as the firm logged record inflows. The division had $1.6 trillion assets under management in the quarter, down from $1.7 trillion in the previous quarter.

Institutional securities, bolstered by a $3.4 billion gain on the value of Morgan Stanley’s debt, had its third-quarter revenue increase 122 percent percent, to $6.45 billion. Asset management reported revenue of $215 million for the period, down 73 percent from the previous year on losses in firm investments.

Morgan Stanley achieved a strong return on equity, something that many firms have found to do this difficult environment. Return on equity from continuing operation, a key measure of profitability, was 14.5 percent, compared with 9 percent in the second quarter. Return on equity measures the amount of money that a company delivers on each share, and is a closely watched ratio among investors.

The firm declared a five cent quarterly dividend for its shareholders. It will be paid on November 15 to shareholders who had stock on October 31.

So far this year, Morgan Stanley has set aside $12.69 billion to cover compensation and benefits, up 6 percent percent from year-ago levels. The firm had 62,648 employees on the payroll at the end of the third quarter, down slightly from the 62,964 employees in the previous quarter.

The firm’s third-quarter results come during a tough time for financial stocks, which have struggled amid regulatory uncertainty and a weak global economy. Shares of Morgan Stanley have fallen 38.9 percent this year, to $16.63 a share.

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