Morgan Stanley makeover five years on 4 Morgan Stanley chief executive James Gorman has overseen major changes since the GFC Average return on equity 40 30 20 10 Morgan Stanley and Goldman Sachs are holding more customer cash . Deposits ($USbn) Morgan Stanley Goldman Sachs 75 50 25 ... putting less of the firms' capital at risk of loss on any given day Goldman Sachs Morgan Stanley Value at risk (SUSm) 250 200 150 50 2003 05 ... and lowering the dependence On trading Percentage of revenue from trading 80 Goldman Sachs 07 09 07 11 60 40 20 2003 All banks 2003 04 05 06 07 08 GFC REDUX AARON LUCCHETTI THE WALL STREET JOURNAL MORGAN Stanley, the US in- vestment bank, has nearly four million brokerage customers and thousands of corporate and in- vestment clients, but they aren't the top priority these days. "Your No I clientis the govern- mentt" John J. Mack, Morgan Stanley's chairman and chief executive from 2005 to 2009, told current chief executive James Gorman in a recentphone call. Mr Gorman, who was visiting Wash- ington that day, agreed. The global financial crisis didn't kill Morgan Stanley, though it came close. The near-death ex- perience brought the US govern- ment into its life in a new way. There are tougher capital rules, regulators prowl the office floor looking for land mines, and Mr Gorman phones Washington be- fore making major decisions. Other banks face the same n 12 2003 05 05 Morgan Stanley 07 09 11 Source: the companies, FDIC scrutiny, but in the five years since the crisis hit, Morgan Stanley has become one of the most closely watched experiments in finance. After being nursed back to health by a supportive Federal Reserve, the 77-year-old securities firm is undertaking an extreme make- over to lose its pre-crisis risk- taking ways. The entire industry is wrestling with the same big ques- tion: can Wall Street still prosper in the face of tougher new regu- lations or has the crisis taken away its swagger for good? By both force and choice, Mor- gan Stanley has upended its cul- ture and ethos. Go-go trading businesses once hailed as its fu- ture are gone or curtailed. In their place, the storied investment bank has embraced the retail brokerage business peddling stocks and doling out financial ad- vice to ordinary investors a less exclusive club more often associ- ated with names like Merrill Lynch and Schwab. Morgan Stanley's transfor- mation has been dramatic. The firm's top five executives before the financial crisis have all left. Mr Gorman, a one-time Merrill Lynch executive and McKinsey consultant, beeame Morgan Stan- ley chief executive in 2010 after being at the firm for just four years. He pushed for the $1J SS bil- lion acquisition of brokerage firm Smith Barney, essentially doub- ling down on the business of cater- ing to regular investors while dealing away riskier units. The firm has changed in less noticeable ways too. There now are 3000 measures restricting such things as how much capital traders can put at risk, up from 30 before the crisis. About 50 full- time government regulators are now stationed at Morgan Stanley. There were none before 2008, when it was regulated as a broker- age firm instead of a bank. Most deals over $USIO million ($10.8m) now require a green light from a risk committee and Mr Gorman. "It actually makes life a lot sim- pler," said the 55-year-old chief executive. The traders "know ex- actly the size of the sandbox they're playing in" For the high-rolling traders who used to make more than $US10m a year, Mr Gorman has had a simple message: take fewer risks or move to a hedge fund, where failure doesn't threaten the financial system as much. One small sign of the times: the cigar shop on the ground floor of Morgan Stanley's Times Square headquarters, a favourite of for- mer chairrnan Richard Fisher, de- camped downtown in 2011 be- cause business was poor. The space is now occupied by a bakery that sells mini cupcakes. Mr Gorman's supporters say the firm is setting an example after Wall Street'syears of excess, forg- ing a business that more closely resembles the banking industry's old model of eschewing risky bets and collecting reliable fees. 'They're not perfect, but there's been real progress at that bank," says Sheila Bair, former chairman of Federal Deposit Insurance, which started regulating Morgan Stanley more closely after it be- came a bank-holding company in 2008. "Gorman has really tried to have a safer risk profile." Morgan Stanley's stock- market valuation today is about $US53bn, down from nearly $US90bn in mid-2007, though it stock is up about 44 per cent so far this year. Its market value is less than peers such as Goldman Sachs and regional players like Minneapolis-based LIS Bancorp. Partly because of the firm's size, the market remains skittish about Morgan Stanley'; capacity to weather another crisis. Whenever there is trouble in the market, its shares tend to drop more than the stocks of other ma- jor banks. Overhauls like Morgan Stan- ley's are going on all across Wall Street. No firm, with the possible exception of Goldman, looks the same as it did before the crisis. Bank of America bought Merrill in a shotgun marriage encouraged by the federal government. Citigroup has struggled and sold assets, and Sanford I. Weill, the former chief executive and architect of the sprawling bank, now says it is worth thinking about breaking apart big banks. Wells Fargo has grown through its opportunistic purchase of stric- ken Wachovia, and JPMorgan Chase has done the same by buy ing Bear Stearns, with a shove Continued on Page 24