Hooray, Morgan Stanley Ekes out a Small Profit!

…and further proves it’s no Goldman Sachs.

Let me begin by congratulating those at 1585 Broadway for doing what many deemed impossible – actually turning a quarterly profit in 2009. Okay, to be fair, earnings expectations had been around 27 cents per share, and MS came in at 38 cents for a whopping total of $757 million.

Now, $757 million is better than a large negative number, which MS had posted during the three preceding quarters. However, it’s a far cry from the $3.6 billion that emerged from 85 Broad. While GS and MS had often been mentioned in the same sentence, the credit crisis has put a chasm between the two, with Goldman ending up on the better side.

The problem isn’t that MS has suddenly become a crappy franchise with inept management and incompetent employees across the board. No, the problem is that global investment banks make their money off two operations: banking and trading. MS remains quite good at the former. In fact, according to Thomson Reuters, Morgan overtook GS as the top-ranked M&A adviser through the third quarter of 2009.

Unfortunately, on the trading side, Morgan’s results continue to disappoint, and in an environment where M&A remains slow, trading weakness is an extremely bad thing for the bottom line. "Weakness" may seem like an overstatement since this quarter, MS notched $2.1 billion in fixed income revenue and $1.1 billion in equity trading gains. While $3.2 billion in sales and trading revenue isn't a drop in the bucket, it is more than $5 billion behind Goldman's number and even less than Citi's. Accounting for the large gap are Morgan's fixed income results, more than $2 billion lower than Citi's and almost $4 billion lower than Goldman's.

What explains this poor showing? Since Lehman’s collapse, MS has cut back its trading exposure in favor of less risky activities like private wealth management (hence, the joint venture with Citigroup’s Smith Barney). However, competitors like GS have upped the ante, and so far, the decision has yielded great gains.

Perhaps Morgan’s more cautious attitude will ultimately prove prudent. But if MS wants to once again be mentioned in the same breath as its downtown rival, it will somehow need to turn in much better trading results. And with a new chief that has no trading background, something tells me the boys at 1585 Broadway will have a hard time.

Credit where Credit (Suisse) is Due?

I’ll preface this post by saying that Credit Suisse (CS), the Swiss financial services giant, is by no means the bellwether of the financial industry, but it is a place worth paying attention to. Compared to its Zurich-based counterpart, CS has fared relatively well during the credit crisis. Of course, it doesn’t take all that much to beat UBS, which dropped the paltry sum of $18 billion last year. Still, of all the global investment banks headquartered in Europe, CS and Barclays have probably fared the best since Lehman collapsed.

If you disagree or simply don’t give a shit about banks across the Atlantic, fear not since the point of this post is not to survey the competitive landscape beyond our borders. Rather, I bring up CS because the bank made headlines today with an announcement to more closely link bonuses to firm profitability. In doing so, the bank will follow Morgan Stanley, UBS, and Citigroup by awarding a greater portion of executive pay in salaries as opposed to bonuses.

As CS is now the fourth major investment bank to make such a move, I am not calling attention to the decision on account of its originality. I do, however, think it’s important because CS wasn’t under as much pressure as either UBS or Citigroup to make any changes. Unlike UBS and Citigroup, which together lost nearly $50 billion last year, CS kept its annual loss to only about $7 billion. Okay, -$7 billion isn’t chump change, but it did make CS the most profitable global investment bank in Switzerland in 2008.

The real question is whether a move to alter compensation practices will matter. At this point, I think it’s too early to tell. Clearly, though, something has to be done, and in the upcoming months, I expect even better positioned banks to make similar announcements. A bonus system that encourages traders to bet the house (if not the country) is a system that no doubt needs to be reformed. And with a framework that better aligns the incentives of employee and employer, perhaps the most profitable Swiss bank going forward will actually make a franc or two.