In a recent article, one of my fellow Alpha contributors wrote about Morgan Stanley's corporate governance:
"In part due to such factors, Morgan Stanley is rated "B" on its corporate governance. However, the bank's environmental, social and governance (ESG) risk overall is "D", given the numerous regulatory problems it has experienced in the recent past and other factors. And Morgan Stanley's financial statements reflect an AGR score of 33, indicating higher accounting and governance risk than 67% of comparable companies."
The lack of governance was probably more evident in the recent $65 million worth legal suit filed against a former hedge-fund manager and onetime managing director, Joseph "Chip" Skowron III, at FrontPoint Partners, which used to be owned by Morgan Stanley (MS), who is accused of an insider-trading scheme costing the firm tens of millions of dollars.
Are you looking at the monetary aspect only? Think about how bad corporate governance can lead to lower ROE. Remember the blood feud between aggressive Colm Kelleher and more reserved Paul Taubman. And this lack of anonymity has certainly affected the performance of the investment bank unit of the firm. Just for record, the company's IB segment posted a ROE, a measure of profitability, of less than 4% in the first nine months of 2012, behind arch rival JPMorgan Chase & Co. (JPM)'s 17%. In 2006, ROE at Morgan Stanley's investment bank was 30%.
"We must continue our intense focus on improving ROE," Gorman, 54, said in an internal memo obtained by Bloomberg News. "Aligning sales trading more closely with investment banking and capital markets will allow us to explore and extract new revenue opportunities within institutional securities and better manage our costs."
This lack of proper ethical corporate governance factor again cropped up when the company was sued by IKB Deutsche Industriebank AG (IKB) over claims of "misrepresentations and omissions about the underwriting standards used for the underlying home loans, as well as regarding the loan-to-value ratios of the loans" worth around $147.1 million. That's a huge amount to write off as one-time expense!
This might be affecting the performance of institutional securities segment. Equity sales and trading revenues fell from $1.3 billion to $1.2 billion. What has Colm Kelleher been doing all this time? As a matter of fact, the IB unit led by Taubman performed better than larger trading segments led by Kelleher. The bank ranked fourth in investment-banking revenue among its largest global rivals in the first 3 quarters of this year, as held in 2011 and 2010. The firm is seventh in trading revenue this year, compared with sixth in 2011 and eighth in 2010.
If you are thinking that IB unit is doing well, so what if the sales and trading segment doesn't does that well? Increase in one side and decrease on another just balance everything out. So, there's not ultimate profit, is there?
It might be wise to remember that the company's stocks have fell by over 5% till date after the third quarter results were released. More surprisingly, the stocks fell by around 6.93% after the resignation of Paul Taubman, while the industrial index fell only by over 2%. Is the price ever going to rebound? Well, the stock is currently trading at price to book ratio of 0.52, just like 0.58 of Citigroup (C), 0.85 of Goldman Sachs (GS) and 0.87 of JPMorgan Chase (JPM). So, if you are looking for capital appreciation, there are two immediate choices: Citigroup and Morgan Stanley.
Here's a quick rundown on their stats:
Earnings per share
LT D-to-E ratio
From the numbers above, if you are looking for daily income, Morgan Stanley might be better with the low stock price. But if you are looking for significant capital gain over time, Citigroup seems to be in a stronger position.
And with the serious corporate governance issues hovering over Morgan Stanley, it doesn't seem to be a good stock to go for.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Stock investing is subject to market risks. Please consult your personal financial adviser before putting your stake.