John Mack, a.k.a. Mack the Knife, gave vent Wednesday to the frustration and anger that comes when $120-million (U.S.) of your savings vanish in the space of a few hours.
As the chief executive officer of Morgan Stanley watched the value of his investment bank slashed at one point by 44 per cent, on fears that his would be the next Wall Street titan consigned to the scrap heap, Mr. Mack fired off a lunch-hour memo.
"We're in the midst of a market controlled by fear and rumours. There is no rational basis for the movements in our stock," thundered the 63-year-old CEO. Hours later, those fears and rumours had Mr. Mack reportedly in merger talks with larger banks.
Mack the Knife is missing something. He doesn't realize folks think Wall Street is no longer rational. These people see an era drawing to a close.
The Street that's made millionaires, and billionaires, out of traders and deal makers is being torn up, and will soon be a far less lucrative place to work.
You see, Morgan Stanley and Goldman Sachs aren't tanking on their financial results. These venerable brokerage houses are being pounded because the whole concept of independent investment banks no longer works.
In the wake of Lehman Brothers' failure and fires sales at Bear Stearns and venerable Merrill Lynch - houses that all survived the Great Depression - it's hard to argue that Wall Street isn't busted.
Mr. Mack, for all his bluster, is bowing to this new reality. The CEO saw a stake in his 45,000-employee firm, worth $288-million last year, melt Wednesday, despite Morgan Stanley's announcement of better-than-expected profit. As the stock plummeted, Morgan Stanley was reported in merger talks Wednesday night with commercial bank Wachovia, which has its own balance sheet woes. On news of Wachovia's overtures, one Canadian brokerage house CEO, safe in the arms of a well-capitalized parent, joked: "They are trying to land the Hindenburg on the deck of the Titanic."
The problem is a change in attitude. Investment banking has always been a risky business. And these days, no investor wants to own risky.
For generations, independent dealers deftly used small amounts of their own capital to take massive positions in stocks and bonds. That's called leverage, and it translated into fortunes for the dealers and their employees.
But leverage cuts both ways. When Wall Street's massive holdings are money-losing bets on U.S. residential mortgages, and there's no way to dump the portfolios, then a bank's capital gets burned up quickly. Suddenly, the emperors of finance find they have no clothes.
Personal fortunes amassed through decades of work are being vaporized. Lehman boss Dick Fuld had a $1-billion stake in his firm just 18 months ago, took home a $34-million paycheque, and enjoyed a sterling reputation. This week, his holdings are worth $1.3-million, he's unemployed and his name is mud.
The rest of the financial community is quickly coming to a view expressed Monday by CIBC World Markets CEO Richard Nesbitt. "I don't think around the world there's any place for a large investment bank unless they're part of a commercial bank. I don't think they'll exist, except for the very, very tiny investment dealers."
At times like these, there is virtue in a conservative Canadian approach that sees deep-pocketed bank-owned dealers commit relatively small amounts of their own capital to trading, and independent houses focus on fee-based work for small companies. They haven't experienced the losses seen on Wall Street, and highly profitable retail banks mean survival is not an issue.
However, there's still raw fear among staff at Canadian houses, and in Europe, along with lower Manhattan.
We're now into a self-fulfilling spiral. Hedge funds were cutting back on trading yesterday with Morgan Stanley and, to a lesser extent, Goldman Sachs, on fears the carnage is not over. If Wall Street comes unstuck, everyone in financial services will suffer.
And there's a long-term fear that this time, a way of life is threatened. Because this time, the Street likely won't bounce back when markets do.
New rules are clearly coming. After staring into the abyss, boards of directors and regulators will limit the leverage available at investment banks. Both U.S. presidential candidates are promising to wrap the industry in red tape. Derivative markets will dry up. It all means profitability will suffer. And when profits drop, so too do the bonus cheques that buy Porsches and summer homes.
Independent investment banks ran Wall Street for generations. This week, their survival is in question, as is the way of life they represent.
Morgan Stanley (MS)
Close: $21.75, down $6.95
Andrew Willis