Blue Blood and Mutiny: The Fight for the Soul of Morgan Stanley
Patricia Beard’s telling of the events that led to the ousting of Morgan Stanley’s chairman and chief executive Phil Purcell in 2005 is a clear case of history written by the victors. In Blue Blood & Mutiny, there is only one character wearing a black hat.
That’s Purcell, a former executive at Sears, Roebuck, the giant Midwestern retailer, who created the Discover credit card, later merged his company with the white-shoe investment bank bearing the name of American history’s most powerful banker – and then nearly ran it into the ground.
Yet as lopsided as Beard’s account may be – Purcell clearly declined to participate with the author – it offers a useful window into the fallibility of the advice machine of Wall Street. Beard chronicles, in occasionally excruciating detail, just how flawed the counsel of some of America’s most trusted advisers to corporations, executives and governments can be. And because the investment banking profession espoused by firms like Morgan Stanley has become the de facto viral mechanism for spreading capitalism around the globe, Blue Blood makes for compelling reading.
According to Beard, it is not just Purcell whose conduct contravenes JP Morgan Jr’s credo that ‘the banker must at all times conduct himself so as to justify the confidence of his clients in him and thus preserve it for his successors’. Take Purcell’s chief consigliere, Martin Lipton, one of Wall Street’s most powerful lawyers and the founder of the poison pill takeover defence.
Lipton’s advice to Purcell – essentially that he come out with guns blazing against any challenges to his authority from long-suffering Morgan Stanley shareholders – failed entirely to recognise sweeping changes the democratic shareholder movement of the past two decades had wrought.
Even the winners in Beard’s tale exhibit clumsiness. The Group of Eight – an assemblage of former Morgan Stanley partners that led a public proxy campaign against Purcell’s leadership exhibited their share of missteps. But John Mack, the Morgan Stanley executive who eventually replaced Purcell – and runs the place today – made the most critical mistake of all.
Beard traces Mack’s critical blunder to a Sunday in February 1997 at the New York home of Morgan Stanley’s then-chairman Richard Fisher. It was at this eventful meeting that the $10.2 billion merger of blue-blood Morgan Stanley with Purcell’s Dean Witter Discover – which once housed stockbrokers inside 300 of the retailer’s stores (earning it the derisive label of the ‘socks and stocks’ company) – was agreed.
Fisher’s butler served his employer, Mack and Purcell hors d’oeuvres of tuna tartare and quail eggs in the Fisher dining room adorned with a Robert Motherwell collage and an Arshile Gorky watercolour. At one point during the discussions Fisher told his acolyte Mack he should not give up his title as chief executive. Mack responded, ‘It’s not our firm – meaning that Morgan Stanley belonged to the shareholders and employees.’
In the end, Mack ignored Fisher’s advice and handed the top title to Purcell as part of the merger with an understanding that he would succeed him in the top slot within a few years. This unwritten accord became known as ‘the handshake agreement’, becoming the fulcrum for the fight at Morgan Stanley eight years later. As an unnamed colleague of the men tells Beard, ‘John was used to doing business like that with Dick Fisher. They agreed on things and they happened. In retrospect, John admits it looks naïve.’
The decision to forego a formal succession agreement goes against the very advice that Morgan Stanley’s investment bankers routinely offer their corporate clients. As any banker readily admits, a merger’s ‘soft issues’ – Wall Street euphemism for who gets what title and when they get it – are among the biggest factors in determining whether a transaction goes forward or is alternatively prematurely torpedoed. Mack should have known better than to have accepted such vague reassurances from the wily Purcell.
When it became clear within a few years of consummating the merger that Purcell had absolutely no intention of vacating his corner office for him, Mack left. He turned up running Credit Suisse’s investment bank, while Morgan Stanley under Purcell languished. The chairman became famed not for the decisions he took, but instead for his painful habit of avoiding taking them. In an industry where bankers must commit regularly to assist their clients, particularly in doling out their precious capital, this led to a form of paralysis that ran through every layer of the organisation.
Equally, Purcell’s lack of comfort in taking balance-sheet risk impaired Morgan Stanley’s ability to generate earnings on a par with rivals like Goldman Sachs. Among the decisions Purcell did make was the shuttering of the firm’s merchant banking arm on the very cusp of a boom in that business. Morgan Stanley is today still trying to rectify this by raising a fund of some $5 billion to invest alongside leveraged buyout clients like Blackstone Group and Permira.
Beard tries to make the case that the revolt of former Morgan Stanley partners signified a triumph of the old firm’s core ethical values as articulated at its founding by Morgan, ‘The idea of doing only first-class business, and that in a first-class way.’ In reality, it was the firm’s failure to generate exceptional profits and the lacklustre performance of its stock during his reign that ultimately led to Purcell’s demise.
An adviser to the Group of Eight, a former Morgan Stanley banker who left to set up shop with Robert Greenhill – whom Mack had previously toppled from the presidency of the firm – sums it up cogently. ‘Two of the overwhelming factors that contribute to the culture and greatness of investment banks are “How do you feel about your CEO?” and “Where’s your share price?”’ notes Scott Bok, now co-chief executive of Greenhill & Co.
Purcell was bedevilled by a share price that had lagged behind all of its major competitors. Over the five years preceding the Group of Eight’s assault on Purcell’s leadership, the shares had fallen by almost a third while other Wall Street firms had retained their value. Similar underperformance led more recently to the rapid departure of Merrill Lynch chief Stanley O’Neal.
On Wall Street, where employees are loaded up with equity compensation, the stock price matters most. It helps retain and incentivise staff, and is a prime currency to recruit talent. And because retired – even ousted – officials leave with their portfolios chock full of their employer’s shares, their fortunes are tied to the firm’s future performance and exposed to the decisions of its management for years to come.
Morgan Stanley’s lagging stock price – a function of Purcell’s poor stewardship – united employees and retirees and aligned them with other shareholders. Combined with poor advice from some of America’s most trusted counsellors, Purcell had absolutely no chance of retaining his job. It is a lesson other Wall Street titans would be wise to consider.
Review by Rob Cox.