Morgan Stanley’s Richard Portogallo Learns From Crisis

Richard Portogallo, head of Morgan Stanley’s U.S. equities division, says last year’s financial crisis was a game changer. He explains how the cataclysmic events of 2008 will reshape the financial services industry’s future.


When Richard Portogallo left his job running Morgan Stanley’s illustrious prime brokerage business in January 2006 to head up the bank’s U.S. equities division, his promotion signaled how important hedge funds had become to banks. During his almost 20 years in prime brokerage, the Brooklyn native had established relationships with virtually every large hedge fund firm in the world — just the sort of clients that banks were hoping to win more business from.

Over the next 18 months, Portogallo refocused his new division on client service while embracing the changing technological landscape of equities trading, including such innovations as direct market access. Then the financial crisis hit, culminating in the dramatic September 2008 collapse of investment bank Lehman Brothers Holdings, which sparked fears that the highly leveraged Morgan Stanley would be next to fail. Portogallo tells Institutional Investor Staff Writer Imogen Rose-Smith what Morgan learned from last year’s crisis, and how the cataclysmic events of 2008 will reshape the financial services industry’s future.

1. Institutional Investor: How did the crisis change your outlook for the industry?

Portogallo: October 2008 was a game changer, not just for us but for everyone. We are looking across the whole business, leveraging what has made us best in class, combined with a more astute awareness of the business linkages and dependencies such as collateral, funding and risk. Hedge fund business continues to be an important driver of revenue for us. However, the real money, the long-only space — pensions, sovereign wealth funds — will also get significant time and resources.

2. How hard was it to win back hedge fund business?

I have spent a lot of time this year talking to clients and former clients individually. You need to put yourself in their shoes to get a better appreciation of the dislocation they may have felt. I think it’s also fair to say that clients were looking for more certainty around pricing and terms. It took some time for us to get that right. There were clients who felt that they had an obligation to other prime brokers and were reluctant to move balances back immediately — and, of course, just inertia. However, by the spring balances were really starting to come back, and they continue to do so.

3. Are hedge funds now less important to the bank?

Not at all. I am a big believer that the hedge fund industry is going to grow. I think it is going to go through a renaissance — the mediocre performers are going to have been flushed out; the strong will not only survive, but prosper; and you are going to have a resurgence of talent.

4. What is Morgan doing to capture more real money business?

Investing in research is key. We are also putting more resources behind electronic trading, structured solutions and derivatives for those clients. Real money is morphing into absolute-return investing; you are going to see a convergence, and given our prime brokerage platform, we have an implied advantage.

5. How have you changed the way you finance the prime brokerage business?

We now work much more closely with the funding team that sits outside of prime brokerage to help us on pricing, and specifically, on how to be more efficient in pricing collateral. We put a lot more resources behind that. We are much smarter and more efficient in how we fund our prime brokerage business. The crisis really uncovered everything that potentially could go wrong and forced us to come up with preventive measures to protect our clients and our franchise from ever having that happen again. Living through the crisis and being able to talk about it is one thing. Doing something about it is another thing. We learned a lot, and now we are applying what we learned.