Morning Coffee: Morgan Stanley's layoffs bode badly for Goldman Sachs. George Soros' mistake
Morgan Stanley CEO James Gorman is a McKinsey & Co. consultant by trade. Maybe this makes him more dispassionate about cutting costs? Either way, Morgan Stanley was one of the first banks to pull the trigger on cuts to its fixed income trading business and has now become one of the first banks to make pre-bonus cuts in 2017.
Earlier this week, we reported that Morgan Stanley was cutting bonuses (by 4%) and heads (an unspecified quantity) in equities trading. Now, Reuters reports that Morgan Stanley has also axed a bunch of senior investment bankers and shaved bonuses by 15%, give or take, due to declining revenue from deal-making and capital-raising. The cuts have reportedly hit senior investment bankers hardest, with around 20 bankers going from the IBD division globally - more than in a usual year
This looks ominous, because as with equities sales and trading, Morgan Stanley was by no means the worst performer. The bank ranked fourth for investment banking fees last year – disappointing perhaps but certainly not catastrophic.M&A revenues at Morgan Stanley were down 10% year on year in the first nine months of 2016 and ECM revenues were down 37%, but at Goldman Sachs they were down 20% and 48% respectively. If Morgan Stanley's making big cuts in IBD, therefore, surely Goldman Sachs should too?
Maybe so. Then again, Goldman CFO Harvey Schwartz said last year that the banks' relationship focused corporate finance bankers were among its most important assets and that the bank is more than willing to sit out a hiatus in deal-making until things pick up again. That's good: Global investment banking fees across Wall Street declined 7% in 2016 to a three-year low, according to Thomson Reuters. Across the industry, equity capital market fees declined 23%, the biggest drop of all banking activities as initial public offerings were few and far between. Mergers-and-acquisitions activity also slowed from record levels in 2015, with global deal volume falling 17%.
Separately, no one is more disappointed about the results of the U.S. election than George Soros, who Wall Street Journal reported lost around $1bn during the stock-market rally in the wake of Donald Trump’s shocking presidential election victory.
Adding insult to injury, Duquesne Capital Management founder Stanley Druckenmiller, Soros’s former deputy BFF who helped him grab $1bn of profits betting against the British pound in 1992, anticipated the market’s recent climb, turned bullish and collected big gains, according to the Wall Street Journal.
Soros became more bearish immediately after Trump’s election, not a lucrative stance as the stock market rallied on expectations that Trump’s policies will boost corporate earnings and the overall economy. The S&P 500 Index has risen 5.6% since Trump’s election through yesterday, per Bloomberg.
The Journal said some of Soros’s trading positions incurred losses around $1bn. He exited a good number of his bearish bets late last year, avoiding further losses.
The silver lining for the Hungarian-born hedge fund legend? The broader portfolio held by Soros’s firm gained about 5%.
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Photo credit: Morgan Stanley building by Alan Wu is licensed under CC BY 2.0.