Thursday, December 20, 2007

Where Have All the Profits Gone?

I’m just so tickled by this sentence in the Morgan Stanley (MS) press release yesterday: “Morgan Stanley, with the exception of its mortgage related businesses, delivered exceptionally strong performance this year.”

Yes, and with the exception of my face, hair and body, I look exactly like Angelina Jolie.

When some trades done by a single desk in a single quarter can lead - oops - to a $9 billion writedown (causing Morgan to join Merrill and Citi in the Mile High Mortgage-Related Losses Club), it’s time to add “risk management” to our list of oxymorons.

According to Morgan’s 2006 proxy, one of the jobs of its Audit Committee, and rightfully so, is to oversee the “integrity” of the firm’s risk management. It would be goofy to expect independent directors to take out their calculators and second-guess Morgan’s trading risk assessments, but maybe they could have given a bit more thought to the firm's reporting structure, because you don't need math for that.

Morgan’s risk managers apparently reported to the lately departed Zoe Cruz, who oversaw the firm’s trading as its Co-President. As Pete Seeger sang in the 60s, when will we ever learn? The Street long ago rescued compliance officers and in-house lawyers from so-called "business" reporting lines, and for good reason: Try telling a trader who is also your boss that, sorry, her latest brilliant bonus-driving deal is off because you, the earnest lawyer, have spotted a wee regulatory iceberg on the horizon. Risk managers, like lawyers, sometimes need to be spoilsports or worrywarts; these are tough roles to play, and even tougher when one is reporting to the head of the profit-making machine.

The morning after announcing the first quarterly loss in its 72-year lifespan, the usually well-groomed Morgan Stanley is looking a bit haggard. Of course, when Angelina is 72 she may not look so great either.

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