NEW YORK (DOW JONES)--Morgan Stanley's (MS) gamble to reinvent
itself amid the worst financial crisis since the 1930s is garnering
support among investors.
The nation's second-largest securities firm, which in autumn
barely survived a bruising run on the bank by hedge funds, is now
the most sought-after financial stock of 2009: Its shares, at
$21.34 in midday trading, have risen nearly 33% in January.
Morgan Stanley shares are still down more than 50% in the past
year. But the revival of the stock, however tentative, stems from
growing confidence in its push into retail brokerage and banking;
new capital and financing options; and a lowering of fear among
investors that the financial crisis will upend the firm.
Chief Executive John Mack has stepped up efforts to reach out to
big institutional investors, one person inside the bank said.
Morgan Stanley declined to make top executives available to talk
for this story.
Mack and other top executives have ramped up the number of
meetings with major money managers to sell them on Morgan Stanley's
new retail-focused strategy, people familiar with the bank said.
The blueprint hangs on a $2.7 billion deal to take control of
Citigroup Inc.'s (C) Smith Barney brokerage unit, and plans to
build a retail banking operation from scratch.
Morgan Stanley's leadership - which Bank of America Merrill
Lynch analyst Guy Moszkowski said has been "noticeably more upbeat"
- appears to be getting a hearing from investors. In contrast to
Morgan Stanley's surging stock in January, shares of Goldman Sachs
Group Inc. (GS) have edged down about 1%, while there have been
sharper declines at JPMorgan Chase & Co. (JPM), down nearly
16%, and Bank of America Corp. (BAC), down more than 50%.
"John Mack has a reputation as a very hands-on guy that presses
the flesh and makes phone calls, he knows how to work the Rolodex,"
said Anthony Sabino, a professor of law and business at St. John's
University. "People are regaining faith they will do the right
thing."
Even more striking is that the turnaround comes despite
continued pressure from the short-sellers that Mack railed against
in a memo for "creating a market controlled by fear and rumors."
The stock has rallied even though short contracts surged to 60
million as of Jan. 15, up from about 18 million at the height of
the credit crisis in October, according to data from the New York
Stock Exchange.
"This shows us that despite all the headwinds against this
stock, there are a lot of buyers who are able to absorb the short
selling," said Nick Perry, an equities analyst at Cincinnati-based
Schaeffer's Investment Research. "That just shows you how much
demand there is for Morgan Stanley right now."
Analysts said Morgan Stanley has outlined a number of steps in
the past four months to assuage nervous investors. The firm closed
out 2008 trying to ensure it does not follow the failure of Lehman
Brothers Holdings Inc., or lose independence like Bear Stearns and
Merrill Lynch & Co.
Morgan Stanley first raised $9 billion by selling Japan's
Mitsubishi UFJ Financial Group (MTU) a 21% stake in the firm. It
then received $10 billion from the Treasury Department as part of
the government's $125 billion plan to inject capital into the
nation's nine biggest banks.
But the company really caught the attention of Wall Street this
month.
The company's wealth-management business will be transformed
once it is combined with Smith Barney later this year. The joint
venture, of which Morgan Stanley will control a 51% stake, will
become the nation's largest brokerage with 20,386 financial
advisers. The stock has risen more than 20% from before word of the
combination leaked out earlier in January.
Morgan Stanley became a bank holding company last September, and
it plans to build retail deposits to have access to another source
of funding. It has lured top executives from Wachovia Corp. to
craft the firm's retail vision. Ben Jenkins, who was previously
vice chairman of Wachovia before the Charlotte-based bank was
acquired by Wells Fargo & Co. (WFC), joined Morgan Stanley
earlier this month.
Speaking at a financial-services conference in New York
Wednesday, Chief Financial Officer Colm Kelleher said the bank's
institutional securities unit will remain a core business. He told
an audience packed with investors that the company is well
positioned, and "has successfully evolved and withstood some
difficult times."
That doesn't mean Morgan Stanley's problems are behind it. The
financial-services sector remains volatile as major banks are
starved for additional capital. There still remains uncertainty
about more bank failures.
"Just because you survived the nuclear blast isn't something to
cheer about if you're a shareholder," said Joe Battipaglia, a
market strategist for Stifel Nicolaus. "The banks still face
another trillion dollars of losses and a massive need for
capital."
He said the financial sector will likely face steep losses this
year from areas like residential and commercial mortgages, and
other high-yield investments. He also said Morgan Stanley and other
banks will find it harder to operate with increased government
scrutiny.
Major U.S. banks have sold preferred stock to the government to
boost capital, and financing by banks remains under strain. And, in
the coming weeks, the Obama administration is expected to broaden
the government's Troubled Asset Relief Program, setting up a "bad
bank" to buy some troubled assets, and insuring other assets still
on banks' books.
"We've crossed the Rubicon and there's no going back,"
Battipaglia said about the government's role in the banking
industry. "This is a transformational time for Morgan Stanley and
everyone else."
-By Joe Bel Bruno, Dow Jones Newswires; 201-938-4047;
joe.belbruno@dowjones.com
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