“Investment banking is an industry whose relationship with its clients has now changed irrevocably,” Jonathan A. Knee wrote on March 2nd in a controversial Wall Street Journal editorial about the current state of investment banking. Knee, a professor at Columbia Business School, worked at Goldman Sachs and Morgan Stanley during the dramatic upheavals of the Internet revolution and the recent scandals that have plagued the industry. In his new book, The Accidental Investment Banker Knee provides a candid account of how the long established and idiosyncratic culture of banking was shaken and transformed by the boom and bust decade—and not necessarily for the better.Below is an excerpt from the preface of The Accidental Investment Banker.
Thousands packed the pews of the Riverside Church on the upper West Side of Manhattan that foggy, wet January afternoon for the memorial service for Richard B. Fisher, former leader of Morgan Stanley. Mayor Michael Bloomberg attended, as did David Rockefeller and other dignitaries. So did scores of young bankers who may have never met Fisher, but for whom his name was legendary.
This outpouring of affection was both touching and somewhat unexpected. By the time he died at the age of 68 on December 16th, 2004, Fisher had become a marginal figure at the global financial institution with which his name was once synonymous. Fisher joined Morgan Stanley in 1962 and became its President in 1984. By the time he negotiated the fateful merger with Chicago-based Dean Witter, Discover & Co. in 1997 – making Dean Witter’s Phil Purcell the combined company’s CEO and Fisher’s protégé John Mack President and Chief Operating Officer – Fisher had been Chairman of Morgan Stanley for six years.
Yet well before the recurrence of the prostate cancer that ultimately took his life, Fisher had been drifting, or rather been pushed, further and further away from the investment bank he had once led. Although Fisher became executive committee chairman immediately after the merger, this was downgraded to something called chairman emeritus in 2000 soon after he was nudged from the board.
When, in 2001, a frustrated Mack resigned and Fisher asked for the opportunity to address the Board, Purcell delivered the painful news: the Board did not wish to hear from him. Even Fisher’s office had been moved first off the main executive floor and then out of the building altogether, quietly banished to a place known internally as Jurassic Park – where retired senior bankers were given cubicles and secretarial support.
Among the throngs at the service were a distinguished group of seven fellow inhabitants of Jurassic Park, including Fishers predecessor as chairman, S. Parker Gilbert. Most of these men had grown up with Fisher in the Morgan Stanley of the 1960’s. Looking around the crowded church they could not help ponder just how much had changed since that time.
In the 1960’s, Morgan Stanley quite pointedly did not have a securities sales and trading operation, viewing it as a low class business engaged in by mere, and largely Jewish, traders. In 1971, however, the bank had established its own sales and trading desk, and put Fisher, a young partner at the time, in charge. In recent years, the profits from these operations had come to dwarf those of the traditional gentleman banking in which they had engaged in their heyday. The introduction of sales and trading at Morgan Stanley coincided with the firm’s launch of one of the first mergers and acquisitions departments among the major investment banking houses. Prior to that, these firms had often treated advice on mergers and acquisitions as something given away free to longstanding clients of the firm. Within a decade or two, “M&A” would establish itself as the profit engine of traditional finance, with high profile bankers whose names were often better known than that of either the clients or financial institutions they in theory served.
And, of course, the biggest change of all was that, with its couple of dozen partners and several hundred employees, the Morgan Stanley of the 1960’s was the dominant investment bank in the world. In the competitive and labyrinthine world of contemporary finance, such overall consistent preeminence was simply not possible. But even within the relatively narrow realm that had been the core of Morgan Stanley’s great franchise -providing quality independent financial advice to the leaders of the world’s great corporations – the torch had been passed some time ago to Goldman Sachs.
If the emergence during the 1970s of sales and trading and M&A as the ultimate profit centers planted the early seeds that changed the culture and structure of the investment banking industry and Morgan Stanley’s place in it, many other internal and external events played critical roles in bringing the Firm to the state it found itself in early 2005. Morgan Stanley’s own decision in 1986 to sell 20% of its shares to the public was dramatic both for its rejection of the private partnership tradition that had prevailed for so long and for the fact that the money was being raised to enable Morgan Stanley to participate more aggressively in the leveraged buyout (or LBO) fad then sweeping the industry. During this era, public companies perceived as undermanaged or undervalued became the target of takeover artists who finaced these deals by placing previously unheard of amounts of debt. In these deals, Morgan Stanley might not only place this debt, but invest its own money to consummate a transaction. As controversial as it was for Morgan Stanley to sponsor companies with such a heavy debt burden, a more significant line was crossed when the firm moved from agent to principal and actively pursued these opportunities for its own account, even in competition with clients.
The government’s decision a decade later to allow the large commercial banks to aggressively pursue investment banking business put further pressure on the old way of doing things. The Depression-era legislation known as Glass Steagall had long insulated the rarified investment banking partnerships from assault by these better capitalized institutions. Its ultimate repeal in 1999 paved the way not only for radically intensified competition but a wave of mergers that created enormous financial supermarkets with an entirely different ethos.
But at Morgan Stanley anyway, nothing compared with the changes wrought by its combination with Dean Witter Discover. Although billed as a “merger of equals,” it soon became clear that the most the most venerable Wall Street brand of all time had actually sold itself to a decidedly down-market retail brokerage and credit card company. When long-time Morgan Stanley veteran Robert Scott got up to speak at the memorial service, the small clique of Fisher’s contemporaries was reminded of just how badly things had gone for the Morgan Stanley side of the once promising deal. Scott, although 10 years younger than Fisher and not precisely of their generation, had been only the latest of a steady stream of senior Morgan Stanley executives who had been ruthlessly dispatched by Purcell once they began to pose a threat or their usefulness to him had expired. Fisher had designated Scott, a former head of investment banking to lead the merger transition team for Morgan Stanley when the deal was announced in February 1997. But before the month was out and well before the deal closed that May, Scott suffered a heart attack. Purcell’s decision to appoint the physically weakened Scott as Mack’s replacement as President and COO in 2001 was widely viewed as the least threatening way to throw a sop to the Morgan Stanley side of the house in the face of their heir-apparent’s departure. Two years later, after Scott’s 33 years at Morgan Stanley, Purcell told him that his services were no longer needed. The only other Board seat reserved for a company executive was quietly eliminated, leaving Purcell clearly, and solely, in charge.
“Dick’s still watching over us,” Scott assured the gathering, his voice cracking with emotion.
“We’re going to be all right.”
Some were not so sure….