“You can only take so much pain ... Eventually, I am sure Morgan Stanley will turn around, but the firm has become harder and harder to defend because it still hasn’t turned the corner."  Those sentiments were expressed by investment manager David Foley of Estabrook Capital Management.  He had held some 661,000 shares of Morgan Stanley as of 12/31/10.

Mr. Foley and many other shareholders also appear to be losing patience with CEO James Gorman who, for the past 16 months has been waging a campaign to rebuild Morgan Stanley.  Yet, the company's stock price is lower today than when Gorman took over in 2010.  First quarter earnings, due out next week, are not expected to be of any help.  Many analysts are cutting their Q1 forecasts.

        Mitsubishi Joint Venture.   Despite a flurry of management changes and a big hiring spree to bolster its trading business - which has been a big money maker for Wall Street firms - Morgan Stanley continues to be hobbled by one time legacy items.  Take, for example, M. Stanley's joint venture with Mitsubishi UFJ Financial Group  - named, Mitsubishi UFJ Morgan Stanley Securities.  The venture is expected to post a fiscal year loss of $960 million.  While Morgan Stanley has a 40% minority stake in the venture, and doesn't control the unit, it's nonetheless a black mark to the investment bank's reputation.  

And things are unlikely to improve with this investment in the near term.  Morgan Stanley still has expensive ties to Mitsubishi.  In addition to the joint venture losses, dividend payments to Mitsubishi on its $9bn invsetmnet amount to almost $900 million a year.  Getting out of the deal has proved more difficult than many executives had initially thought.  The dividends will continue until the 2 parties come to an agreement to end them, or until the stock trades above $37,875 for 20 days out of 30 consecutive trading days.  For this to happen, M. Stanley's stock would have to increase 41%. 

        Fixed Income Department is Priority #1.  Mr. Gorman has told investors that fixing Morgan’s fixed-income department is his No. 1 priority, and he recently named a longtime Morgan Stanley executive, Ken deRegt, to run the division.  But fixes will not come easily - the F-I, currency and commodities division lost $29 million in Q4 of 2010, and trading activity has not fully recovered from the financial crisis.  Furthermore, turning around the fortunes of its fixed-income department will require a great amount of capital - it's a capital-intensive business.  While the firm has considerable capital to support trading operations, it's restricted from putting it to work elsewhere.

        Citigroup Joint Venture.   Finally, there's Morgan Stanley deal with Citigroup - where they merged their retail operations.  Morgan controls the venture and, in 2012, it has the option to buy an additional 14% of Citi's stake, which would raise Morgan Stanley's stake to 65%.  A year later, it can buy another 15%, and the remainder in 2014.  All told, those purchases would cost $12-$14 billion - a very big deal for the company.   Stay tuned.   [NYT Dealbook, 4/12/11]