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James Gorman, the president of Morgan Stanley, started to change the way his company did business back in 2009 when he purchased Smith Barney from Citigroup. It was a ballsy move back then. The deal cost Morgan Stanley $13.5 billion. Citigroup needed the cash because of the bad collateralized debt obligations they had on their books. Morgan Stanley wasn’t in the best shape, cash-wise either. Gorman had to raise $2 billion in equity to close the deal. Critics of the deal thought that the commissions generated by more than 18,500 financial advisors might not be enough to justify the purchase. But Gorman had another trick up his financial sleeve. He decided to switch priorities in 2010. He hired 200 lending specialists for Morgan Stanley Wealth-Management offices across the country. Those specialists would allocate money, but they were also assigned the task of lending money to America’s super-rich.
Seven years later, Gorman’s deal has paid off. During that period, Morgan Stanley Wealth Management, which is the new name for the marriage between Morgan and Smith Barney operations, has increased its lending to $61 billion. That turned into more than $3 billion in net interest income last year. That is twice the amount of interest the company received in 2011. In the second quarter of 2016, Wall-Street loans to the super-rich generated more revenue than the company’s equity underwriting division and merger-advisory division combined. It seems the super-rich that have stock positions don’t want to liquidate them, and they want to invest in other assets, so they borrow the money
Gorman started the trend to lend money to wealthy investors, and now Bank of America, Merrill Lynch, JP Morgan, Goldman Sachs, Wells Fargo and UBS are doing the same thing. The plan is a money-maker for Wall Street in a time when many Wall Street schemes are hampered by strict SEC regulations. The total amount of loans that the big banks are giving to their wealthy clients totals more than a half a trillion dollars last year. That’s double what it was ten years ago. The commissions and fees on that amount are mind-blowing. But the wealth managers do more that lend money to the super-rich. They act like CFOs for these wealthy families, and they shower them with perks and gifts that only the super-rich could afford.
Hedge funds are notorious for shaking companies up when they invest a huge amount of money in stock. Hedge fund giant, Morgan Stanley, has a valuation of more than $56 billion, so it’s a big fish to catch for another hedge fund that wants to change how the firm is managed. But ValueAct, the activist hedge fund managed by Jeff Ubben, just bought 38 million shares of Morgan Stanley, and that investment is worth more than $1.1 billion. ValueAct likes to take a firm position in corporations and then ValueAct lobbies for changes. Those changes could be a new CEO or a stock buyback plan, according to an article published by businessinsider.com. ValueAct manages about $17.4 billion in assets, according to a recent regulatory filing. Morgan Stanley is not the only firm to feel the bite of ValueAct. Ubben has run change campaigns against Adobe Systems, Valeant Pharmaceuticals, and Microsoft.
No one is sure what ValueAct will do with Morgan Stanley. According to the Wall Street Journal, ValueAct is not going to make any changes in the company. ValueAct isn’t talking at the moment. It seems like Ubben and company have some kind of hidden agenda when it comes to Morgan Stanley, but Ubben is keeping quiet. Shares of Morgan Stanley rose 1.4 percent in after-hours trading after the stock purchase was announced.
James Gorman, the Chief Executive Officer of Morgan Stanley, has focused on wealth management since he took office, and he has played down fixed-income trading. Morgan Stanly cut 25 percent of its fixed-trading employees last year. Insiders familiar with Jeff Ubben say Morgan Stanley is in for changes. Ubben doesn’t invest unless he can effect change.
ValueAct’s reputation was tarnished a bit in 2014 when the Department of Justice accused ValueAct of violating premerger regulations relating to a Halliburton and Baker Hughes deal that was on the table. ValueAct paid the DOJ $11 million to settle the case. Ubben said he disagreed with the Department of Justice interpretation, but he wanted to put the issue to bed.
The hedge fund industry is having a difficult time in 2016. Several of the top hedge funds have closed, and more are expected to close by the end of the year.