Morgan Stanley picked good time to back bad client

3 minute read

Morgan Stanley CEO James Gorman (L) participates in a conversation-style interview with Economic Club of Washington President David Rubenstein in Washington September 18, 2013. REUTERS/Yuri Gripas

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NEW YORK, April 16 (Reuters Breakingviews) - Corrects to change “year” to “quarter” in fourth paragraph.

In normal times, an investment bank making a $911 million loss on a single client would be a major banana skin, and the firm in question would be wise to disclose it pronto. Fortunately for Morgan Stanley (MS.N), Archegos Capital Management failed in deeply abnormal times. Thanks to a rip-roaring quarter, the effects of backing the wrong client barely registered.

James Gorman’s firm on Friday reported $4 billion of earnings for the first three months of 2021, a 150% increase on a year earlier. Such outperformance was the norm on Wall Street, amid rollicking markets and a surge in underwriting stock and bond issues. Trading revenue at Morgan Stanley rose 29% year-on-year. The average for the big five U.S. firms, which also include Goldman Sachs (GS.N), Citigroup (C.N), Bank of America (BAC.N) and JPMorgan (JPM.N), was a 23% increase.

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Not that Archegos didn’t inflict symbolic pain when it imploded at the end of March. Add back the $911 million that the ill-starred family office cost Gorman’s crew and Morgan Stanley’s quarterly stock-trading revenue would have beaten arch-rival Goldman Sachs. Return on equity would have been 20% rather than the actual still-very-respectable 17%. Moreover, the loss blots an otherwise clean copybook. Morgan Stanley was the only one of its pack to escape nine-digit losses when South African retailer Steinhoff hit financial trouble in 2017.

The fact that Archegos did so little damage is luck, but also design. The happy effects of buying brokerage E*Trade and asset manager Eaton Vance last year are kicking in. Wealth and investment management added around $770 million of pre-tax income for the quarter, a little less than Bill Hwang’s defunct fund ripped away. Client assets grew by 10% or so, on an annualized basis. And more brokerage deposits mean less reliance on expensive capital-markets funding, which Morgan Stanley estimates should add another $200 million or so in profit for this year.

In a weird way, Hwang has done Gorman a favor – by validating his strategy of chasing more stable means of making money than trading securities. Investors are already on board with that shift: Morgan Stanley trades at 1.5 times its forecast book value, according to Refinitiv, better than Goldman’s 1.3 times. It’s just better when the cautionary tale comes at someone else’s expense.

Follow @johnsfoley on Twitter


- Morgan Stanley reported $4 billion of earnings applicable to common shareholders for the first quarter of 2021, a 150% increase on a year before, despite a $911 million loss caused by the failure of private hedge fund Archegos Capital Management.

- The Wall Street firm made $2.9 billion of revenue from its equities trading division, where the Archegos losses were registered. That still marked a record. Trading revenue overall increased 29% year-on-year.

- Chief Executive James Gorman said on April 16 that the loss had been contained by the firm’s swiftness to “cauterize bad stuff,” and said the problem arose because of a concentrated single-stock position.

- Archegos, a family office run by investor Bill Hwang, collapsed at the end of March. That impacted several banks, most notably Credit Suisse, which incurred a $4.7 billion pre-tax loss.

- For previous columns by the author, Reuters customers can click on

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