When John Mack returned to Morgan Stanley as chief executive in 2005 after a heated boardroom split, the move was widely seen as a victory for the firm’s investment bankers and traders. Those masters of the universe had chafed under the leadership of Philip Purcell, who had hailed from the company’s lower-brow retail brokerage and credit card subsidiary, Dean Witter, Discover & Co. Mack, who started his career as a Morgan Stanley bond trader, seemed just the man to restore Morgan’s core investment banking franchise to its former glory.
It’s no small irony, then, that as Mack prepares to step down as CEO at the end of this year, the firm’s strongest point is arguably its retail brokerage arm, not the investment bank. The latter business has racked up tens of billions of dollars in losses on subprime mortgages and other bad assets over the past two years and has so far missed out on the revival of Wall Street trading profits this year. The brokerage arm, however, has risen to the top of the industry thanks to a $2.7 billion merger with Citigroup’s Smith Barney unit. And it’s a sign of the times that the brokerage’s boss, James Gorman, is succeeding Mack as CEO.
Morgan Stanley Smith Barney, the new venture owned 51 percent by Morgan and 49 percent by Citi, is the world’s largest brokerage firm, with $1.42 trillion in client assets and 18,444 financial advisers — ahead of longtime industry leader Merrill Lynch & Co., now an arm of Bank of America Corp., which has $1.3 trillion in assets and 15,008 advisers. Morgan still trails in terms of profitability, but Gorman has already made strides and vows to prevail on that measure as well. ....