One of the world's top investment banks, Morgan Stanley serves up a smorgasbord of financial services. The company operates in three primary business segments: institutional securities (capital raising, corporate lending, financial advisory services for corporate and institutional investors); global wealth management group (brokerage and investment advisory services, financial planning for individual investors and businesses); and asset management (services and products including alternative investments, equity, fixed income; merchant banking; investment activities). Morgan Stanley has more than 1,300 office in more than 40 nations serving corporate, institutional, government, and individual clients.
Like the rest of the financial services industry, Morgan Stanley has been repositioning itself in the wake of global recession. Like Goldman Sachs, the firm converted to a bank holding company at the height of the financial crisis in 2008, a change which allows it to acquire a commercial bank to shore up its balance sheet if need be. However, the structure also subjects Morgan Stanley to tighter scrutiny, especially as banking regulations, such as the Dodd-Frank Act limiting proprietary trading, come into play.
The company has also been increasingly focused on its asset management and wealth management operations, a strategy which allows it have less dependence on the volatility of the investment banking markets. In 2009 the company merged its wealth management business with Citigroup's to form Morgan Stanley Smith Barney, which was rebranded in 2012 as Morgan Stanley Wealth Management. Morgan Stanley owns 65% of the combined company, one of the largest wealth advisors by headcount with some 17,000 financial advisors; Morgan Stanley is upping its stake in the venture and plans to buy the remainder of by mid-2015. In all, Morgan Stanley's wealth management business has more than $1.7 trillion in client assets.
Morgan Stanley has taken advantage of its new bank holding status and has formed a private banking business to serve its wealthy Morgan Stanley Wealth Management customers. The new operation will be built over time. It also provides corporate lending, including bridge financing, through Morgan Stanley Bank.
On the other hand, restrictions come hand in hand with new Morgan Stanley's bank status with the passage of finance reforms. The Volcker Rule limits how much banks can invest in hedge funds and other speculative investments; as such, Morgan Stanley sold a majority of its FrontPoint Partners hedge fund to its management in 2010. The following year the firm spun off its proprietary trading arm to that unit's management.
Morgan Stanley is also liquidating its German P2 Value property fund. It had frozen the fund during the peak of the financial crisis in 2008 in order to prevent asset sales. With the two-year German deadline to either reopen or liquidate the fund looming, Morgan Stanley chose to begin selling off its property assets in 2010. The decision reflects the slow recovery of Europe's real estate market.
The company doesn't have much interest in pursuing retail business (banks or otherwise). It sold its retail asset management business, including Van Kampen, to Invesco for some $1.5 billion in cash and stock in 2010 in order to focus on its wealthiest clients and institutional investors. The company announced a similar deal in early 2012: It will sell its Quilter wealth management division, which serves the UK's mass-wealth market, to private equity firm Bridgepoint Capital.
Japanese bank Mitsubishi UFJ paid some $9 billion for a 21% stake in Morgan Stanley in 2008, making it the company's largest shareholder. The two companies also combined their brokerage operations in Japan. However, the joint venture lost some $655 million in that year's first quarter, which prompted Morgan Stanley and Mitsubishi to renegotiate their deal. In 2011 the Japanese bank converted most of its preferred shares to common stock, boosting its ownership to 22% and gaining a board seat. Morgan Stanley has saved some $800 million annually in dividend payments on those preferred shares.
Morgan Stanley's Asian operations got a boost in early 2011 when regulators in China gave the go-ahead for the company to begin establishing operations there. It launched a joint securities venture with China Fortune Securities later that year; Morgan Stanley owns a third of the business, the maximum stake allowed. China is a strategic market for growth for the company, as are the emerging economies of Brazil and India.
The company's revenues rose slightly (by some 3%) to $39.3 billion in 2011 over the year before. The earnings were impacted by a fourth-quarter $1.8 billion charge Morgan Stanley took related to a settlement with bond insurer MBIA. (Morgan Stanley has lost some $3 billion since 2007 from its exposure to bond insurers including MBIA. The settlement, in which the insurer agreed to pay Morgan Stanley some $1.1 billion, will eliminate the insurance contracts under question.)
Morgan Stanley's insitutional securities business saw a modest rise in revenues in 2011, slightly offset by lower investment banking activity and the Mitsubishi UFJ transaction. Its equity sales and trading revenues increased by some 40%, and fixed income and commodities sales and trading rose by some 27%. The company attributes the increases to higher client balances plus a widening in its debt-related credit spreads on borrowing. In global wealth management, income and net income saw growth, while asset management revenues fell due to lower net investment gains, primarily in the merchant banking and traditional asset management businesses. – less