Goldman Sachs didn't have a great third quarter. Nor did Morgan Stanley's investment bank. In the three months from the end of June, fixed income trading revenues at Morgan Stanley fell 43% year-on-year, M&A revenues fell 17%, and equities underwriting revenues (a hotspot for Goldman Sachs) fell 28%. Only Morgan Stanley's equities traders and debt capital markets (DCM) bankers have been having fun - revenues in these businesses rose 12% and 28% respectively. Hooray. Or not.
If you're a trader, Morgan Stanley's results don't bode well. Trading has become a more boring occupation at Morgan Stanley. Like Goldman Sachs, the bank is becoming increasingly risk averse, especially when it comes to credit and rates. In the past quarter, Value at Risk (VaR)in Morgan Stanley's trading business fell 17% versus the same period of 2012. In its rates and credit trading businesses, VaR fell 30%. Morgan Stanley's traders are being asked to rein in their animal spirits, heavily.
Nor is Morgan Stanley's strong equities performance necessarily great news if you want an equities trading job. Last month, James Gorman said equities trading is returning to a pure agency model where banks simply match up buyers and sellers and take no risk of their own. In Gorman's world, equities salespeople have all the power; traders are mere automatons.
If you're a trader who wants to take risk and play with a generous balance sheet, Morgan Stanley doesn't look like the place to be. 67% of Morgan Stanley's average tier 1 common capital was allocated to its investment bank in the last quarter. The investment bank rewarded shareholders by generating a return of just 4%, down from 7% in the preceding quarter. Either Morgan Stanley will have to withdraw capital from the investment bank or it will have to increase returns without increasing risk-taking. The most obvious way of doing so will be to cut pay.
For the moment, Morgan Stanley has resisted the pay-slashing option. Unlike Goldman Sachs, which cut accrued compensation by 35% in the past quarter, Morgan Stanley reduced pay in its securities unit by a mere 8%. Expect deeper cuts to come.