Morgan Stanley (MS) chief executive James Gorman is alerting senior bankers and traders inside the big investment firm to expect low bonuses this year -- and in some cases, no bonus -- even as he continues to tell investors concerns about the firm’s exposure to troubled European banks are overblown, the FOX Business Network has learned.
The seemingly contradictory messages underscore the dicey situation faced by Morgan Stanley and Gorman, who will take on the additional role of chairman at year’s end. While the bank is in much better financial shape than it was during the dark days of the financial crisis in 2008, and may even surprise investors with solid third-quarter earnings in a couple of weeks, it must operate in a dismal business environment exasperated by increased regulatory costs.
Gorman provided the grim assessment to investment bankers and traders in recent weeks as the firm’s share price has gotten hammered by fears of its financial exposure to banks in Europe. The FOX Business Network was first to report that Gorman has been personally involved in the firm’s effort to stop the massive selling in Morgan’s stock, contacting several top analysts and investors to explain why the rumors of losses stemming from Europe were wrong.
In fact, senior executives inside Morgan say the firm is likely to announce decent third-quarter earnings -- despite all the market turmoil -- that will beat arch-rival Goldman Sachs’s (GS) third-quarter results. Some analysts say Goldman may post a third quarter loss.
“[Gorman] has been very insistent with his messaging to downplay bonus expectations,” one senior Morgan executive told FOX Business. “In some cases managing directors will be getting zero, if they wish to keep their job.”
A spokesman for Morgan wouldn’t deny the matter.
In past years, when Wall Street was flush with cash, Gorman could expect a mass exodus of traders and bankers after handing out year-end bonuses. On Wall Street, executives are paid a relatively modest yearly salary (anywhere from $150,000 - $250,000), but often make several times their salary in bonuses based on the revenues they produce for their firms.
But because revenues are slumping everywhere on Wall Street, executives have nowhere else to go if Gorman stiffs them on year-end bonuses, as is expected.
The big Wall Street firms and banks have seen their shares fall significantly in recent weeks as investors price into their outlook not just the firms’ exposure to Europe, but also a weaker business environment, and the increased costs associated to comply with the new Dodd-Frank financial overhaul.
Dodd-Frank, enacted after the financial crisis, forced firms to leave risky, but lucrative, businesses like proprietary trading. Critics claim, however, that these businesses had little to do with the crisis that led to a massive bailout of every major bank following the September 2008 bankruptcy of Lehman Brothers. But by shedding the businesses Wall Street firms and banks will be less profitable and be forced to cut staff.
In fact, firms Bank of America (BAC) and Goldman have announced recently large-scale cost-cutting plans that will include, particularly in the case of BofA, big layoffs.
As FOX Business previously reported, Morgan hasn’t announced layoffs, but senior executives have developed contingency plans to slash staff if business conditions don’t improve.