[ by Melanie Gretchen ]

If CEO James Gorman wins his appeal to the Federal Reserve, Morgan Stanley may own the rest of Smith Barney sooner rather than later.   Mr. Gorman hopes to buy the remaining 35% of the brokerage firm by the end of this year, or sometime in early 2013 – 2 years ahead its 2015 buyout date, under its agreement with Citigroup.

Chances are ... it may take more than a full-court press with regulators;  Mr. Gorman and his brokerage chief, Greg Fleming, are locked in negotiations with the Federal Reserve, according to Morgan Stanley insiders.

What's at Stake

• The Fed is concerned whether Morgan Stanley, the smallest of the big financial firms, has a large enough capital cushion to snap up the remaining piece of Smith Barney and remain compliant with new banking regulations such as Dodd Frank and the Basel III.
• Mr. Gorman and Mr.Fleming contend that the firm’s capital would continue to remain strong even with expedited buyout schedule, as the firm has argued that the additional capital would be “an incremental cost of around $500 million,” a person with direct knowledge of the matter

The deal was ... that Morgan Stanley would purchase Smith Barney in increments, beginning during the height of the financial crisis 4 years ago.  Earlier this month, it continued its progress with another 14%, to bring its ownership level to 65%.

However, that's not fast enough for the CEO and his brokerage chief, it would seem.  They want to speed the process up in order to fully implement their strategy of retooling Morgan Stanley from a firm that specialized in capital markets activities such as trading and underwriting to one that dispenses advice to investors through the largest brokerage force in banking.

How's Morgan Stanley Doing?

Cons

• Cost overruns and lack of profitability have plagued the new business model
• A new technology system has had so many glitches that brokers have a difficult time signing up new clients

Pros

• Currently, Morgan Stanley has more than 17,000 brokers in offices across the country, more than any other company
• Earlier this month, an independent firm valued Smith Barney at just $13.5 billion – far less than what Citigroup said it was worth, meaning Morgan Stanley would have to pay less to buy the rest of the unit

Mr. Gorman and Mr. Fleming will use their latest advantage to persuade the Fed that the firm is strong enough to buy the remaining piece.  [C-I Note: Are their chances better now than 2015?  Ben Bernanke and Janet Yellen's terms as Chairman and Vice Chairman expire on 1/31/14 and 10/4/14 respectively.  For his part, Mr. Gorman has been CEO since 1/1/10 after he joined the firm in 2006.]

For further details, go to [Fox Business, 9/21/12].