MorganStanley

January 1, 1924 –Present

Dean WitterReynolds and

DiscoverJanuary 1, 1978 –February 5, 1997

Miller Anderson& Sherrerd

January 1,1969 –January 3, 1996

MorganStanley Capital

Management LLCSeptember 23, 2008 –

Present

Morgan StanleyGroup Inc.

March 31, 1986 –May 31, 1997

MSDW CreditProducts Inc.

September 23, 2008 –December 29, 2011

SmithBarney

January 1, 1938 –January 1, 2009

Dean Witter& Co.

January 1, 1924 –January 1, 1978

DiscoverBank

August 30, 1911 –January 1, 1981

ReynoldsSecurities

January 1, 1931 –January 1, 1978

Morgan StanleyDomestic

Holdings Inc.September 23, 2008 –

Present

Morgan StanleyDelta Holdings

December 9, 2011 –Present

Morgan StanleyBank National

Assoc.May 25, 1990 –

Present

Morgan StanleyPrivate Bank

National Assoc.August 10, 1996 –

Present

MountainwestA Federal Savings

and Loan Assoc.January 1, 1922 –

May 25, 1990

Morgan StanleyCredit Corp.

January 31, 1985 –May 1, 2011

Morgan StanleyTrust National

Assoc.April 16, 2003 –

July 15, 2011

Union Federal Banka Federal Savings

BankDecember 17, 1934 –

August 10, 1996

Ontario Savingsand Loan Assoc.January 1, 1960 –November 4, 1989

Morgan StanleyRank Headquarters Ticker Assets Earliest Known Ancestor Industry of Origin

6 New York, NY MS $803,000,000,000 1911 Investment Banking

B&O Railroad Company stock certificate, 1956.

Morgan Stanley emerged during the Great Depression as a result of the passage of Glass-Steagall, which forced J.P. Morgan to choose between commercial and investment

banking. Most partners chose the former and formed one the cores of the modern JPMorgan Chase (#1). Partners Henry Morgan and Harold Stanley demurred and formed a new, eponymous securities firm independent of J.P. Morgan, but still embodying its credo. According to Jack Morgan in 1933, that was to do “only first class business, and that in a first class way.” Morgan Stanley remained psychologically close to J.P. Morgan in part because it was headquartered nearby on Wall Street, and in part because J.P. Morgan owned most of its preferred stock until the SEC forced Morgan Stanley to redeem J.P. Morgan’s holdings in 1941.

Morgan Stanley managed initial public offerings (IPOs) and private placements of bonds, some $29.3 billion by the end of 1965. After a billion-dollar start in 1936, the pace of its offerings and placements declined and almost dipped below $100 million in 1943. After World War II, however, Morgan Stanley’s book of business rapidly increased as it climbed the investment bank league tables, moving from 34th in corporate underwriting participations in 1942 to 12th a decade later. Morgan Stanley’s ranking in the management of railroad and utility bonds also jumped over that period, from sixth to second place.

Between 1953 and 1965, its offerings dipped below $1 billion just once, in 1956, but more than doubled to over $2 billion in 1957. The company also participated in securities issues managed by other investment banks. Major clients prior to 1965 included American Can, Argentina, Bank of New York (#9), Borden’s, Canada, Colgate-Palmolive,

General Electric, General Motors Acceptance Corporation (#20), Italy, Merck, National Bank of Detroit (part of #36), Otis Elevator, Procter & Gamble, United Air Lines and the World Bank. Some of those clients were new, while others were holdovers from the old House of Morgan.

In 1941 the company became a partnership so that it could take a seat on the New York Stock Exchange. (It also became an associate member of the American Stock Exchange in 1959.) That allowed it to act as a broker in the purchase and sale of stocks and bonds on the exchanges, as well as in the over-the-counter market. Its principal clients were institutional investors like insurers, pension funds, commercial banks and investment funds.

Morgan Stanley also furnished financial advisory services to gov-ernments and corporations, both foreign and domestic. In addition to helping clients issue securities with the features investors desired, it helped corporations to finance mergers and acquisitions, to recapital-ize, to purchase their own stock and to obtain stock exchange listings. The company also valued securities for banks, estates and individuals. Major clients on this side of its business included Aetna Life and Aetna Casualty, American Telephone and Telegraph (AT&T), Baltimore and Ohio Railroad (B&O), E. I. Du Pont De Nemours and Company, Eastman Kodak, H. J. Heinz Company, Johnson & Johnson, Minnesota Mining and Manufacturing Company (3M), Philip Morris, Shell Oil, United States Steel and Weyerhaeuser. In the 1970s the company also began offering advice on mergers and acquisitions as a separate service.

In 1965 four limited partners and 21 full partners owned Morgan Stanley. Stanley had died two years earlier, but Morgan remained

The Big 50: Morgan Stanley195

and was aided by distinguished financiers like John M. Young and Walter W. Wilson. Over the decades, partners came and went, but the company remained respected, safe and secure under their collective watchful eye. That all began to change in the early 1970s when the company, which had been slipping from its perch atop the banking league tables under intense competition from Goldman Sachs (#5) and Salomon Brothers (now part of #3), opened a trading desk and began a bonus system.

Salomon CEO John Gutfreund argued that “the power to distrib-ute securities would become the power to underwrite them,” and Morgan Stanley’s move to develop relationships with institutional investors proved him correct. The company had to sell shares to the public in order to raise its capital, which in 1970 stood at a paltry $7.5 million — far too little to support trading operations of any signifi-cance. Traders and the performance bonuses radically transformed the company’s traditionally staid culture. Employees, the number of whom jumped from 200 to 1,700 over the 1970s, began to work the entire night when necessary, and the company’s capital soared to $118 million.

In 1986 Morgan Stanley sold yet more shares to the public, increas-ing its capital to $1.5 billion. This enabled it to take other companies private in the leveraged buyout wave of the late 1980s. The idea was to borrow (the leverage) money to purchase controlling interests (the buy-out) in underperforming companies, and then slash expenses (often through mass layoffs) and sell off unneeded assets. After several years of profitability, it would then take the company public again. The extra capital cushion was necessary in the event that a company could not

be turned around. In that case, the results were disastrous for everyone involved, including the LBO managers (like Kohlberg Kravis Roberts, or KKR) and their creditors (including Morgan Stanley).

By the early 1990s Morgan Stanley had transformed, according to Frank Partnoy. Now a law school professor, Partnoy in the early 1990s sold so many derivatives for Morgan Stanley, he claims, that the $1 billion his team earned “was enough to pay the salaries of most of the firm’s 10,000 worldwide employees, with plenty left for us.” Even the lowest-level employees, most in their 20s, earned six-figure incomes. Partnoy claimed the unit made so much money because it was com-posed of “rocket scientists” who had “mastered the complexities of modern finance.”

In 1997 Morgan Stanley merged with Dean Witter, Discover & Co. Dean Witter was formed in San Francisco in 1924, went public in 1972 and became Dean Witter, Discover & Co. in 1992. The merged company called itself Morgan Stanley Dean Witter. On September 11, 2001, a fuel-laden commercial jetliner piloted by a terrorist struck Morgan Stanley’s headquarters in the World Trade Center. Most of the 3,700 employees who worked in the building escaped the resulting inferno, but seven lost their lives.

Morgan Stanley got a big boost in 2005 when it replaced embattled Chairman and CEO Philip Purcell with John Mack, a veteran of three decades in the trenches at the storied investment bank. In 2006 Mack changed the company’s name back to Morgan Stanley. The following year, in his biggest move, Mack spun off Discover (#33) after improv-ing its lackluster financials. The move helped the company focus on

AT&T stock certificate, dated May 1, 1964.

Genealogy of American Finance196

Borden’s recipe book. Borden’s was a major Morgan Stanley client in the postwar years.

its trading and money management divisions. Mack also bought real estate, including Hilton Hotels in Europe and office space in down-town San Francisco.

At the beginning of 2007 Mack delivered record revenues across all major divisions: institutional securities, equity sales, fixed income sales, commodities and derivatives trading, assessment management and advisory services. In the league banking tables, Morgan Stanley remained on the heels of Goldman Sachs (#5). Mack attributed the company’s “outstanding results” to “effective, disciplined risk taking.”

As the 2008 financial crisis developed, however, Morgan Stanley lost about 80% of its value. On September 18, 2008, Treasury Secretary Hank Paulson called Jamie Dimon, CEO of JPMorgan Chase (#1), to offer to give him Morgan Stanley for free. Having already been burned by the Bear Stearns buyout, when an initial price of $2 per share had been raised to $10, Dimon demurred. Reconstituting the House of Morgan was not worth the risk, as panic gripped the world’s financial systems. As a result, Morgan Stanley had to become a BHC to tap emer-gency Federal Reserve loans. It also received significant TARP funds and took money from Japan’s Mitsubishi Bank.

At the end of 2013 reporters still described the company as “bounc-ing back” after being “hit hard by the financial crisis” and compared it to giant life insurer MetLife because it had moved so heavily into the relatively staid field of asset management. Trading losses continued to hound it, however, as did lawsuits and potential lawsuits, including one by AIG (#7) regarding a variety of precrisis transactions.

SourcesChernow, Ron. The House of Morgan: An American Banking Dynasty and the Rise of

Modern Finance. New York: Grove Press, 1990.Loosvelt, Derek, et al. The Vault Guide to the Top 50 Banking Employers: 2008 Edition.

New York: Vault, 2007, 50–55.McDonald, Duff. Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase.

New York: Simon and Schuster, 2009, ix–xi.Morgan Stanley & Co.: A Summary of Financing, 1935–1965. New York: Morgan

Stanley, 1965.Partnoy, Frank. Fiasco: The Inside Story of a Wall Street Trader. New York: Norton,

1997.Rogers, Ashleigh. “Which Is the Better Investment: Morgan Stanley or MetLife?”

LifeHealthPro, November 8, 2013.Warren, Zach. “AIG Could Sue Morgan Stanley Over Pre-Financial Crisis Deals.”

Inside Counsel, November 6, 2013.Wetfeet. 25 Top Financial Services Firms. San Francisco: Wetfeet. 2008, 69–72.

The Big 50: Morgan Stanley197