Morgan Stanley has shaken up senior management amid an intensified focus on credit quality and shrinking Wall Street payrolls.
The bulge bracket bank announced that Colm Kelleher, currently co-president of institutional securities with Paul Taubman, will become president of Morgan Stanley’s institutional securities division effective from January 2013, and that Taubman will retire at the end of this year.
Kelleher and Taubman reportedly had an uneasy relationship co-managing the business, with contrasting personal styles: Kelleher the ebullient bond trader and salesman, and Taubman the buttoned-down investment banker.
In a statement, Morgan Stanley said that under “Colm’s leadership, we will continue to align sales and trading more closely with investment banking and capital markets to drive synergies between these businesses and optimize our ability to grow our revenue base and drive profits. We will also continue to invest in our industry leading investment banking franchise, which consistently dominates the league tables.”
Last month, the institutional securities division reported a third quarter pre-tax loss from continuing operations of $1.9 billion compared with pre-tax income of $3.4 billion in the third quarter of last year.
Net revenues for the current quarter were $1.4 billion compared with $6.4 billion a year ago. Debt value adjustment, or DVA, resulted in negative revenue of $2.3 billion in the current quarter compared with positive revenue of $3.4 billion a year ago. Excluding DVA, net revenues for the current quarter were $3.6 billion, compared with $3.0 billion a year ago.
DVA is an accounting valuation technique representing the change in the fair value of certain of a bank’s long-term and short-term borrowings resulting from fluctuations in its credit spreads. A DVA is typically defined as the difference between the value of the derivative assuming the bank is default-risk free and the value reflecting default risk of the bank.
New bank capital adequacy regulations such as Basel III will require banks to adjust the value of their derivatives holdings to account for fluctuations in the bank’s credit risk, including both DVA and credit value adjustment, or CVA.
A CVA is the monetized value of the risk of default by a counterparty in a bilateral OTC swaps transaction. The need to manage both DVA and CVA is complicated by the fact that DVA is more difficult to hedge.
“To hedge counterparty credit risk, banks usually buy and sell CDS [credit default swap] on this name and/or credit indices,” said Rohan Douglas, chief executive of Quantifi, a provider of risk analytics. “But in case of bilateral CVA, the part which depends on a bank’s own credit spread (i.e. DVA) can’t be hedged that easily because bank’s can’t sell protection on themselves. And hedging it with some proxies or indices leave banks with significant idiosyncratic risk.”
Wall Street, meanwhile, is awash in staff reductions. According to a report last month by the New York State Comptroller, the industry has lost 1,200 jobs since the beginning of 2012 and that securities industry revenues declined by more than 7% in the first half of the year, after having declined by more than 20% from 2009 to 2011.
The most recent stress test conducted by the U.S. Federal Reserve Board, the main governing body of the Fed, concluded that the six largest financial firms could withstand a severe economic decline in 2013 and still meet the second set of Basel III capital requirements that take effect from 2014. Basel III kicks in from this January and the banks have to meet a series of rising regulatory capital requirements until 2018 when sufficiently high capital buffers will be in place for banks to withstand periods of extreme stress.
The test also concluded, however, that under such circumstances the six firms could experience cumulative losses that could reach $188 billion by the end of 2013.
