It is fairly natural to feel that Wall Street is going through a troubling malaise. Several major Wall Street institutions are facing serious civil and criminal probes, including Bank of America (BAC) and Goldman Sachs (GS). Despite this trend, certain venerable companies have maintained their positions through prudence and good judgment.
Morgan Stanley (MS) is one of those companies that continues to recover from the Great Recession by reporting strong results and assuring stockholders of their value proposition. Through a combination of conservative growth and honest disclosure, MS holds the torch for an older generation of financial professionals. In fact, MS almost completely avoids the spirit of reckless adventure that has seduced many other financial giants. Perhaps most importantly, MS has reacted quickly and appropriately to changes in the national regulatory environment. Instead of attempting to wring the last bit of value from dangerously obsolete models, MS listens to regulators and attempts to fulfill the letter and the spirit of the law.
MS has staked out an economic culture that stands in stark contrast to the culture at Goldman Sachs. Reflecting this dichotomy, Morgan Stanley recently outperformed Goldman Sachs in a key area. For the first time in five years, MS-linked credit default swaps (CDS) are less expensive than CDS securities for Goldman Sachs debt. Similar to insurance policies, these securities pay owners in the event of corporate default. This sea change in CDS prices reflects a broad investor consensus that Morgan Stanley may be more stable and resilient than Goldman Sachs.
Many are quick to credit Morgan Stanley's steady progression to the deft leadership of CEO James Gorman. Since taking his job in 2010, Gorman has minimized risky trading and emphasized financial planning and retail brokerage services. This refocus is partly responsible for driving record earnings at MS. The firm's third-quarter earnings have soared over those of their rivals at Goldman Sachs.
At the same time, shareholders are increasingly wary of Gorman's counterparts at Goldman Sachs and Bank of America. Once known as an unbeatable risk manager, Goldman CEO Lloyd Blankfein is now widely seen as a weak figurehead who is unable to control the excesses of his organization. While Morgan Stanley isn't completely immune to sea changes in the broader financial world, the company has established its brand as a more stable, less volatile alternative for investors.
Morgan Stanley's earnings reports have led to an impressive 54% increase in the company's stock price so far this year. We would expect this positive trend to continue over the next few years.
In all likelihood, Gorman is quite satisfied to see his corporate strategies vindicated. MS gained many critics when it started to move away from trading as a central part of its business model. In light of the company's continued success, it is likely that more banks and financial institutions will refocus on safer methods for generating revenue.