[ by Howard Haykin ]

Nothing like good news to end the work week.  During a Thursday interview with the Financial Times, Morgan Stanley CEO James Gorman said that staff and remuneration would have to be sacrificed as banks cope with lower profits.  While many of you might be saying that such a comment is nothing really new, consider this:  it is significant because it's the latest sign of the pressure Wall Street is under to cut costs and address high pay levels.

And Morgan Stanley plans to practice what it is preaching.  It is moving ahead with its plans for next year to cut more jobs and pay out smaller bonuses.  Mr. Gorman explains that:  "There's way too much capacity and compensation is way too high.  As a shareholder I’m sort of sympathetic to the shareholder view that the industry is still overpaid.”

New Regulations, Lower Trading Volumes, Increased Competition From Non-Bank Financial Companies.   In common with other large investment banks, Morgan Stanley is responding to pressures caused by these 3 factors - the third coming from such entities as hedge funds and private equity firms.

Deutsche Bank plans to lose at least 1,900 bankers, while Citigroup has said it is shedding an extra 350 employees, mostly traders. Credit Suisse and UBS are both pressing ahead with job cuts announced late last year.

Morgan Stanley itself is already axing 4,000 jobs, 7% of its workforce, by the end of 2012.  Then, in 2013, year, the bank will consider its next round of cost-cutting, including lower pay and bonuses, according to Gorman. 

“Comp [compensation] comes down because the amount of people in the business comes down.  “What the Street has historically done is when revenues went up, they kept the comp-to-revenue ratio flat. They rank comp by ratio. When revenues went down, they increased the comp-to-revenue ratio because they said, ‘We might lose all our people. We have to increase it’.?”

Gorman added: “That’s a classic Wall Street case of ‘Heads I win; tails, you lose’.  Even with the additional cost-cutting, Morgan Stanley is targeting a much more modest return on equity than pre-crisis levels of as much as 23%.  “We’re generating 5%, can we get back to 10%? That’s much more interesting to me than can we get back to 15% or will we ever get back to the glory days - those are completely flawed anyway."

The chief executive is attempting a dramatic transformation of his company by weaning it off volatile trading income in favour of more stable revenues from retail brokerage and wealth management, where it invests on behalf of well-off clients.

News of further pay cuts, including potentially for new entrants at the investment bank, comes just weeks after Goldman Sachs confirmed it was overhauling its well-known entry-level programme for analysts - due in large part becauseGoldman was said to have tired of the number of analysts in the program who ended up leaving the bank for hedge funds.   [The Financial Times, via CNBC, 10/4/12]