November 3, 2024

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Health's Like Heaven.

Morgan Stanley Earnings: Archegos Loss Is No Emergency

“We cauterize bad stuff,” CEO James Gorman said.

Photographer: Simon Dawson/Bloomberg

There’s something fitting about Morgan Stanley’s loss from the blowup of Archegos Capital Management totaling $911 million. By all accounts, the episode was among the biggest emergencies within the banking industry since the global financial crisis.

The hit certainly came as something of a surprise, given that there was little indication of this kind of loss in advance, and Goldman Sachs Group Inc. had already revealed it came out largely unscathed earlier this week. Putting Archegos aside for a moment, though, it’s hard to find any compelling reason for concern about Morgan Stanley’s trajectory. At the highest level, the bank reported record revenue and profit just like its peers. Equity underwriting quadrupled, similar to Goldman and Citigroup Inc. The firm is well on its way toward fully integrating Chief Executive Officer James Gorman’s two large acquisitions from last year: E*Trade Financial Corp. and Eaton Vance Corp. Those deals only look more prescient in hindsight, given the explosion in retail trading volume and heightened interest in socially responsible investing, where Eaton Vance already had a strong foothold with Calvert Research and Management.

Now back to Archegos. Considering that the collapse of Bill Hwang’s family office has created something of a reckoning at Credit Suisse Group AG, which is planning a sweeping overhaul of its hedge fund business and announced several changes within the investment bank’s ranks because of its almost $5 billion loss, Morgan Stanley’s woes look comparatively trivial. Its equity traders, who are accustomed to being the top group across Wall Street quarter after quarter, will survive living with three months of bruised egos.

Gorman addressed Archegos within minutes of starting a conference call with analysts. The firm liquidated large blocks of shares through March 28, leading to a $644 million loss, then “made a management decision” to get out of the risk as rapidly as possible and “clean it up by quarter-end — we didn’t want it to be lingering,” costing $267 million more. “I regard that decision as necessary and money well spent,” Gorman said. Meanwhile, he called prime brokerage “a gem of a business” that’s “a core part of the backbone of the equities business.” He acknowledged that they’ll probably have to look more closely at family offices, but it certainly sounds as if Morgan Stanley views this episode as an unusual one-off event that it’ll learn from.

Glenn Schorr at Evercore ISI asked an important question: Why didn’t Morgan Stanley disclose the loss tied to Archegos ahead of time? Gorman argued that because the bank was having a record quarter, including in the equity trading business where the loss was reflected, it wasn’t viewed as material.

Indeed, here’s a chart of what analysts expected for equity underwriting revenue across Wall Street heading into this week:

Pre-Earnings Favorite

Analysts saw Morgan Stanley retaining its top spot in equities

Source: Bloomberg


And here are the actual results, showing what Morgan Stanley’s revenue would have been were it not for Archegos:

A $911 Million Flesh Wound

Morgan Stanley’s active equity traders made Archegos loss tolerable

Source: Bloomberg, company filings


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