Morgan Stanley and Goldman Sachs: ‘A Rivalry Built on Familiarity’
Every industry has its rivalries. Soft Drinks have Pepsi and Coke. Fast Food has McDonalds and Burger King. College Football has a myriad including Ohio State and Michigan. Investment banks are no exception. Morgan Stanley and Goldman Sachs have been pitted against each other for more than 80 years. That time has seen a multitude of changes across each firm from shifting business models to consuming competitors with an unquenchable appetite. Stand-alone investment banks used to be scattered all up and down Wall Street but financial crises, tightening credit and a torrent of market fluctuations have crippled and bankrupt all but two. Morgan Stanley and Goldman Sachs stand resolute in the cloud of dust left from the most recent financial crisis, no doubt in part because of exceptionally strong leadership.
Michael J. Moore with Bloomberg compares and contrast the differences in focus and leadership styles of the two remaining heads of state in “The CEOs of Goldman Sachs and Morgan Stanley are leading their firms in opposite directions.” As the largest two stand-alone investment banks, their approaches vary considerably from one another, which begs the question “Will one outlast the other?”
For all their history, the firms are embodiments of their current leaders’ visions. Gorman, in the middle of his sixth year as CEO, pushed for a get-big-or-get-out strategy in wealth management even before he rose to the top and seized a chance to buy Smith Barney from Citigroup during the financial crisis. Blankfein, who’s starting his 10th year in command and had opportunities to change Goldman Sachs’s course, decided he liked the businesses he had.
“There’s always been, in the recent period of time, some controversy over business models,” Blankfein told a business school audience in South Africa in April. In the past, many of the largest firms “you could have put into buckets. Now, everyone is almost a category of one.”
Even as trading languished across the industry in recent years, Goldman Sachs has outperformed Morgan Stanley by most financial measures. Its return on equity of 11.2 percent last year was twice as high, and it produced more revenue with 40 percent fewer employees. That’s led to a pay gap: Blankfein was awarded $126.6 million over the past five years, while Gorman received $74.8 million.
Lloyd Blankfein with Goldman Sachs and James Gorman with Morgan Stanley each stand as financial giants among men. With only two direct competitors in their field it will be interesting to see who will pull ahead to set the bar for the other. Since its IPO in 1999, Goldman has outperformed Morgan’s stock up until the last two years. Moore recounts the difference in focus between the two firms. Goldman Sachs Investing and lending account for 20% of their business while the same only account for only 3% of Morgan Stanley’s production.
An interesting idea as to why Morgan outperformed Goldman the past two years is because 51% of their business is now coming from the Wealth Management systems in place. This has been a growing trend that we’ve seen in the industry as clients become increasingly distrustful of trading focused platforms. Morgan Stanley’s trading business is now down to only 31% of the business they do.
Alternatively, Goldman Sachs still collects 44% of their fees through trading and a comparatively dismal 17% from Wealth Management. Their inability to keep of with the growing industry focus on Wealth Management over Trading could handicap future growth or even increase their client attrition rates.
“People find Morgan Stanley really attractive because there is this transformation in place,” says Steven Chubak, an analyst at Nomura Holdings Inc. in New York. “The bull thesis on Goldman Sachs is that if anyone can adapt well to the current challenges, it’s going to be Goldman, because they have a proven track record of doing that time and time again.”
Goldman Sachs’s performance, along with its reputation for aggressive behavior and its short bet on the U.S. housing market, made it the face of Wall Street greed. Morgan Stanley stayed out of the spotlight, prompting the joke told at both firms that it “strategically underperformed” during and immediately after the financial crisis.
Those experiences shaped the banks’ trajectories. Morgan Stanley needs to show steady progress after years of financial turmoil and one-time charges. Goldman Sachs, whose reputation is the worst of any major U.S. company according to a Harris poll this year, has to try to change the public’s perception.
The future is not to be shaped by investor’s perception of each firm as that could be easily manipulated or inflated as the result of general market conditions and sentiments. The future of each will be determined by the paths they take, Goldman leaning towards lending, private equity, and its hedge funds while Morgan Stanley seeks greater market share in the retail brokerage space. Each path presents significant upside potential but one will assuredly outpace the other over time.
With Blankfein and Gorman at the helm of each financial ship and the courses set, each firm can expect to continue to be at the forefront of the industries they’re in in spite of the financial winds and waves crashing as the economic tide rises.
To view the article mentioned in this story: Inside Wall Street’s Most Enduring Rivalry