When Wall Street Hands Employees IOUs, It’s Time to Pay Attention

By Pam Martens: January 16, 2013 

With the nation focused on fiscal cliffs, debt ceilings and austerity plans in Washington, the news from Reuters and the Wall Street Journal might get short shrift that Morgan Stanley has decided to hand its most productive traders and investment bankers IOUs instead of cold hard cash tomorrow for their eagerly awaited 2012 bonuses. When giant Wall Street banks begin to hoard cash and voluntarily impose austerity measures on lavishly paid workers, Congress needs to pay attention. 

According to Reuters, Morgan Stanley will take up to three years to pay 2012 bonuses. The plan will cover all employees, except retail brokers, who make more than $350,000 in wages and whose bonuses are at least $50,000. Adding more angst, the Wall Street Journal reports the bonuses will consist of half cash and half Morgan Stanley stock. Some traders and investment bankers on Wall Street receive as much as 70 percent of their annual compensation in the form of bonuses and have built lifestyles around that compensation system.  

There is a simple reason the retail brokers have been carved out from this plan: an old maxim on Wall Street is that when the lights go off at 6 p.m. in the brokerage firm, the assets walk out the door. The gist is that retail brokers can take their clients and their clients’ assets to another firm if a big enough carrot is waived. Stealing brokers with “front money” of a million dollars or more is a standard practice on Wall Street. Because the broker, not the firm, maintains the close relationship with the client, clients typically follow the broker to the next firm. 

Morgan Stanley has 17,000 retail brokers as a result of combining its retail brokerage force with that of Citigroup’s Smith Barney in 2009. At the time, Citigroup was sorely in need of capital and the two firms created a joint venture, with Morgan Stanley getting a 51 percent stake and paying Citigroup $2.7 billion. In September of last year, the firms agreed on a plan that will give 100 percent control to Morgan Stanley over the next three years. 

Throughout most of Morgan Stanley’s history, its focus has been that of an investment bank, not a retail brokerage firm. After Congress passed the Glass-Steagall Act in 1933 to prevent the Wall Street abuses that led to the 1929 to 1932 financial collapse and the Great Depression by separating commercial banking from securities underwriting, Henry S. Morgan (son of J.P. Morgan Jr.), Harold Stanley and others left J.P. Morgan & Company to form the investment bank, Morgan Stanley. The firm opened for business on September 16, 1935.  In 1941, the firm reorganized as a partnership and the following year joined the New York Stock Exchange. In 1970, the firm incorporated in order to raise capital to expand. In 1972, it became the first investment bank with a dedicated Mergers and Acquisition Group. In 1980 it was the lead manager of the Apple Computer initial public offering. The company went public in 1986. 

Seeing the need for a retail distribution pipeline for the debt and equity deals its investment bank was bringing to market, in 1997 Morgan Stanley merged with the retail brokerage firm, Dean Witter, Discover & Co., launching its foray into the retail brokerage business. 

Now, the slowdown across Wall Street in bringing viable new companies to market in initial public offerings (IPOs) has produced hearings in Congress. New companies, new industries and new technologies mean jobs for the growing ranks of the unemployed and underemployed in the U.S. 

If Morgan Stanley is running the risk of losing its most talented investment bankers by withholding pay, the message is that it does not see the IPO business returning anytime soon. That should concern all of us. 

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