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I Pick You

A longtime reader points to this New York magazine article on the rise and fall of Zoe Cruz at Morgan Stanley. He notes:

1. The article mentioned Bob Scott (Eph) as one of the people who ultimately ended up getting her head.

2. The article argues successfully that she wasn’t good enough at the political game in the firm, and that she hitched her wagon to the wrong star.

3. I think this sideline about motherhood is a canard. As one of the comments in this thread points out, nobody would criticize a male C-suite for only occasionally seeing children.

See here for previous discussion of Robert Scott’s ’68 adventures at Morgan Stanley. Alas, no one has followed my advice from two years ago:

There is a great senior thesis to be written about the last 10 years at Morgan Stanley, and the evolution of the finance system of which it has been a part. A decade ago, smart people thought that the leading financial firms of the future would have a significant connection to average investors. I don’t know anyone who thinks that now.

Bob Scott has seen it all. Some smart junior ought to e-mail him and set up a phone interview. He is an engaging fellow and was kind enough to chat with a sophomore whom I put in touch with him last summer.

Write a thesis about Bob Scott’s career in finance and you will a) Learn a lot and b) Increase your chances of getting a great Wall Street job after graduation.


Fire Mack

Writedowns at Morgan Stanley.

The second-biggest U.S. securities firm by market value after Goldman Sachs Group Inc. said it lost $3.7 billion in the two months through Oct. 31. Prices for securities linked with home loans to risky borrowers sank further than traders expected, cutting fourth-quarter earnings by $2.5 billion, the New York- based bank said. The figure may change by the end of the month.

Chief Executive Officer John Mack oversaw the expansion of the firm’s mortgage business last year with the acquisition of Saxon Capital Inc. for $705 million in December. In addition to being a mortgage provider, Saxon services home loans to people with poor credit histories by collecting payments, maintaining records and foreclosing on delinquent borrowers.

Mack, 62, hasn’t faced the kind of investor criticism that preceded the Nov. 4 resignation of Citigroup CEO Charles O. “Chuck” Prince III and the ouster of his counterpart at Merrill Lynch, Stan O’Neal, on Oct. 30. Zurich-based UBS AG, the largest Swiss bank, fired CEO Peter Wuffli in July.

Why not fire Mack? Trustee Robert Scott ’68 would fill the job nicely. And given that Mack was responsible for the disastrous Dean Witter merger in the first place, his departure would close the circle on that misadventure.

UPDATE: Further thoughts here. Paying Mack $40 million in 2006 for stupidity like buying Saxon is a scandal. He should be fired for his bad decisions. See also my summary from last year. There is a great senior thesis in history or economics to be written about Bob Scott’s time at Morgan Stanley. Who will write it?


Limp Wristers Vindicated

Faithful readers will recall our extensive coverage of Trustee Robert Scott’s ’68 (eventually successful) effort to force of out Phil Purcell, the semi-competent CEO of Morgan Stanley. Best part of the conflict was Senator Orrin Hatch referring to Scott and his allies as “limp wristed.”

The New York Times reports that Morgan Stanley has now followed the advice of Scott and his fellow limp-wristed, grumpy, old men.

He built it. Now he is taking it apart.

John J. Mack, in his boldest strategic move since he became chief executive last year, said yesterday that Morgan Stanley would spin off its slow-growing credit card unit, Discover.

For Mr. Mack, a mastermind behind the 1997 merger with Dean Witter, Discover & Company that brought Discover into the Morgan Stanley fold, the decision is a tacit recognition that the firm’s future success lies with its traditional heart, its lucrative trading and investment banking business.

“The soul is back,” said Anson M. Beard Jr., an advisory director at Morgan Stanley. Mr. Beard was part of a group of former executives who started a shareholder revolt that forced the departure last year of the previous chief executive, Philip J. Purcell. “You have to give John credit for that.”

Not really. Mack didn’t (seem to) do anything to help force out Purcell. In fact, he just sat and watched and then was rewarded when the board needed someone to run Morgan Stanley but, for whatever reason, refused to turn to Scott.

Perhaps Beard means that Mack deserves credit for realizing, after a decade of being wrong, that Morgan Stanley is much better off following the lead of Goldman Sachs: avoiding credit cards, retail brokerage and all the other detritus involved with normal clients while focusing on M&A and proprietary trading.

Better late than never.

Ties between Mr. Mack and the original group of eight Morgan Stanley dissidents have warmed noticeably in the last year. They had become strained when it became clear that top executives like Vikram S. Pandit and Joseph R. Perella would not return to the firm.

A few months ago, Mr. Mack invited Mr. Beard; a former president, Robert G. Scott; and a former chairman, S. Parker Gilbert, among others, to lunch at the firm’s headquarters, where he brought them up to date on his strategic thinking.

Must have been a bittersweet lunch for Scott. Although he must be pleased to see Purcell gone, and his vision for Morgan Stanley as a first and foremost a trading and advisory firm vindicated, the sight of John Mack in control must be a bit galling. Mack was very, very wrong a decade ago about what Morgan Stanley should do. Instead of being punished for this mistake, the fates have rewarded him with the CEO job and a $40 million payday, just for 2006. Where is the justice in that? Recall the history.

The Morgan Stanley Group, one of Wall Street’s elite investment firms, and Dean Witter, Discover & Company, which sells stocks and bonds to small investors, agreed to merge yesterday into the world’s biggest securities company in a transaction valued at $10.2 billion.

But the new firm faces the stiff challenge of integrating Morgan Stanley’s aristocratic culture, where managing directors routinely make millions of dollars a year for advising companies like AT&T, with the meat-and-potatoes environment at Dean Witter Reynolds, whose brokers ply their trade everywhere from suburban office complexes to small-town storefronts. In a way, the merger would be as if Sears and Saks Fifth Avenue decided to join.

Financial marriages, though, are easier contemplated than consummated. For example, Citicorp and American Express discussed a merger late last year and then discarded the idea.

The new company, to be named Morgan Stanley, Dean Witter, Discover & Company, would have a total stock-market value of $23.3 billion at yesterday’s closing price, compared with Merrill Lynch’s $14 billion. It would also have a total of $270 billion in assets under management, including mutual funds and individual accounts, the most of any securities firm.

Morgan Stanley’s stock soared by $7.875 a share on the New York Stock Exchange yesterday, to $54.25. Dean Witter’s shares gained $2 each, to $40.625. The deal was reported by The Wall Street Journal yesterday.

”It makes sense to pick your partner,” Richard B. Fisher, Morgan Stanley’s chairman, said at a news conference in midtown Manhattan yesterday. Mr. Fisher will become chairman of the executive committee of the new firm’s board of 14 directors, half drawn from Dean Witter and half from Morgan Stanley. ”We have initiated this and produced this opportunity together because we believe this is the strongest possible combination we could make.”

Philip J. Purcell, Dean Witter’s top executive, will become chairman and chief executive of the combined company. His No. 2 will be John J. Mack, now Morgan Stanley’s president.

”This is as close to an ideal merger as there is,” Mr. Purcell said. ”It may be a more gray and rainy day for some of our competitors.”

Morgan Stanley and Dean Witter had discussed working together intermittently during the last three years, the firm’s top executives said yesterday, and had even considered possible joint ventures in 1995. The logic, these executives said, was obvious.

But Dean Witter, which gained its independence from Sears, Roebuck & Company only in 1993, seems to have been the more hesitant of the two partners. Mr. Mack was determined to forge an alliance with a big Main Street firm and was fearful that if he did not succeed, his own company — even with equity capital of $5.4 billion — could become a takeover target.

Detailed discussions between Mr. Mack and Mr. Purcell began last summer, but it was only in recent weeks that it became clear that a merger would probably result, executives said yesterday. Both senior managements saw such combinations as Nationsbank’s takeover of Boatmen’s Bancshares, and even Salomon Brothers Inc.’s recent link with Fidelity Brokerage Services Inc. as evidence that it was better to move quickly before either company might itself attract the attention of other predators. The merger was clinched by the signing of a definitive agreement earlier this week.

The new combination, however, holds risks for both firms and for their clients and shareholders. Mergers of equals are notoriously difficult to carry out, and often one partner emerges as the dominant force, as the managment team at Chemical Banking has done in its merger with the Chase Manhattan Bank. Morgan Stanley and Dean Witter called meetings for today to get the merger moving as quickly as possible.

The people at the top of financial services firms, and particularly on Wall Street, are well-known for their powerful egos and ruthless plays for management power and huge financial compensation. This often makes smooth cooperation among senior executives difficult. At yesterday’s news conference, Mr. Purcell sat sandwiched between Mr. Fisher and Mr. Mack, both of whom have proved themselves adept board-room politicians at Morgan.

Morgan Stanley was formed in 1935 out of the bond department of the House of Morgan after the passage of the Glass-Steagall Act that separated the securities and banking businesses in reaction to the 1929 Wall Street Crash and the ensuing worldwide depression. It has always prided itself on its blue-blood heritage. Its 1995 annual report to shareholders trumpeted the principle that J. P. Morgan Jr., one of its founders, enunciated 62 years earlier: ”At all times the idea of only doing first-class business, and that in a first-class way, has been before our minds.”

Despite some digging, I have not been able to determine what Scott thought of the ill-fated merger with Dean Witter, back in 1997. Had he fought it or had he already lost out to Mack within Morgan Stanley? Scott also suffered a heart attack shortly after the merger was announced (and after he had been named to supervise the details). Perhaps that heart attack was the proverbial nail which allowed Purcell to win the boardroom battle to come.

Anyway, there is a great senior thesis to be written about the last 10 years at Morgan Stanley, and the evolution of the finance system of which it has been a part. A decade ago, smart people thought that the leading financial firms of the future would have a significant connection to average investors. I don’t know anyone who thinks that now.

Bob Scott has seen it all. Some smart junior ought to e-mail him and set up a phone interview. He is an engaging fellow and was kind enough to chat with a sophomore whom I put in touch with him last summer.


Limp-Wristed Pig Squealing

For those still following the attempt of Williams Trustee Robert Scott ’68 to force out the CEO of Morgan Stanley, this Michael Lewis article is a must read.

I suppose there might be some shareholders who prefer not to know what’s going on inside their firm –shareholders who prefer not to consider the possibility that there’s anything wrong with the way Morgan Stanley has been run for the past few years. There may also be shareholders who believe that it doesn’t matter how badly Morgan Stanley is being run, so long as potential buyers of their shares don’t hear about it.

There may even be shareholders who take perverse pleasure in paying their chief executive officer $20 million or so a year without demanding anything in return, just as there are moviegoers who, when they see “Deliverance,” think how much fun it would be to be asked to squeal like a pig. After all, once you acknowledge the existence of masochism, you have to also consider that it might express itself financially.

But if I were so foolish as to remain on the Morgan Stanley board of directors and let Phil Purcell have his way with me, I think I would just now be squealing like a pig. And not in pleasure. Silence, like everything else, has its market price, and it’s trending up.

From limp-wristed to pig squealing. This story keeps getting better and better.


From Limp-Wristed to Culture-Carrier

Just when you thought that only EphBabes like Ana Sani ’08 and Victoria Fang ’98 get their pictures in the New York Times, today we have EphHunk Bob Scott ’68.

[Sani and Fang look a lot better. — ed. Perhaps not to our female readers. No heteronormativity on EphBlog, please! — ed.]

The article notes that:

Three of the retired Morgan Stanley executives campaigning for the ouster of Philip J. Purcell met secretly with Morgan Stanley board members late last week and proposed splitting the company in two, according to people briefed on the meeting.

The talks were a major concession by Morgan Stanley’s board, which has previously spurned repeated requests by dissident executives to meet. The executives proposed that Morgan Stanley divide into two companies – one catering to institutions like pension and mutual funds and the other to individual investors. That would spell the end of Mr. Purcell’s vision of Morgan Stanley as a diversified financial services firm.

Previous EphBlog coverage on this story is here, here, here and here.

How is the attempt to force out Purcell going? Well, the betting seems to give Scott an almost 1 in 5 chance of success, at least before June 30th. I am rooting for Scott but find in these odds implausibly good, unless the market knows about some misdeeds by Purcell that aren’t public . . . yet. (Hat tip: BankStocks.)

The Wall Street Journal noted that

The alumni appeared self-serving, many investors say, by putting forward one of their own, former Morgan President Robert Scott, as their choice to succeed Mr. Purcell.

Mr. Purcell pushed Mr. Scott out in 2003. A spokesman for the alumni says it chose Mr. Scott because he is “a culture-carrier who would be capable of attracting back some of the talented professionals” who have left.

I think that the “dissidents” — note the rhetoric here; I bet that Purcell would prefer if they were referred to as “insurgents” — had little choice but to suggest a specific person to replace Purcell. They need to have a “plan” of some sort. Since the article does not quote anyone, even anonymously, on this point, it is hard to tell who Scott and his fellow grumpy old men appear self-serving to.

Yet, to the extent that this is a problem, Scott et al. could volunteer to work without pay for 2 years once Purcell was out. It seems clear that they hate Purcell enough that they would take this deal, although, given his generosity to the College, Williams would certainly be better off if Scott replaced Purcell but kept Purcell’s $20+ million salary.

For the board, the meeting represents a sharp concession. Ten days ago it wrote a cease-and-desist letter to the executives. It is not clear who initiated the talks, but people briefed on the discussions said that the directors met with the dissidents not knowing the details of their proposal. Since the meeting, there have been a few follow-up telephone conversations, but so far there is little evidence that the board is considering the proposal.

The talks with the employees, together with the secret meeting, cast additional doubt on Mr. Purcell’s position and demonstrated a renewed feistiness on the part of directors. Still, one independent director interviewed yesterday said the board stood behind Mr. Purcell. “As far as I know,” the director said, “the board is unified in support of Phil.”

The phrase “as far as I know” is one that should not give great comfort to Phil Purcell.

UPDATE: Thanks to some of the comments below, I have added the word “EphHunk” to the above. EphBlog, as always, strives to be an inclusive community. Cynics might argue that we at EphBlog are too quick to throw around terms like EphBabe and EphHunk. Surely, not all women at Williams, past and present, are babes. Surely, in some objective sense, Scott, for all his many virtues, is not a hunk.

We, respectively, disagree. All Ephs are purple. All Ephs are beautiful. If you disagree, read elsewhere.



When was the last time a Trustee at Williams was called “limp wristed” by a United States Senator? Answer: Yesterday!

“I think it is time that the Skull-and-Bones Society types to stop controlling Wall Street,” said Orrin G. Hatch, the Republican Senator from Utah, and a long-time friend of Mr. Purcell. “I know Phil. He is a tough guy compared to these limp-wristed Ivy Leaguers who want to keep their clubby status. I’m mad, really mad and I will be doggone upset if the gang of eight wins and wrecks this great institution.”

Trustee Robert Scott ’68 is, of course, the leading member of the Gang of Eight. If we could replace “Skull-and-Bones” with “Gargoyle,” this would be the Eph quote of the year.

If I were clever, I would draw a brillant parallel between the battle over the future of Morgan Stanley and the battle over anchor housing at Williams. Phil Purcell == Morty Schapiro. Robert Scott == Alex Bal. Landon Thomas Jr. == Ainsley O’Connell. And so on.

Alas, I am not very clever.


Eph Caddy

The longer the Morgan Stanley dispute involving Trustee Robert Scott ’68 goes on, the more fun it gets.

Although this Financial Times article is subscriber only, here is the good part:

To Mr Purcell’s friends, this shows that some of the Morgan Stanley old guard simply cannot stomach the company’s being run by a man raised in Utah who spends many of his weekends at his family home in Chicago.

Explaining their criticism, some of the dissidents say it is important for senior Wall Street executives to spend time on the New York social circuit at weekends. Mr Purcell’s friends reply that, when the dissidents were in office, most of them spent their weekends at their beach homes in the Hamptons, the Long Island playground for wealthy New Yorkers. Mr Purcell jokes: “It takes me less time to get to Chicago than it does for them to get to the Hamptons.”

Bob Scott, former president and chief operating officer of Morgan Stanley and leader of the group of eight dissidents, dismisses suggestions that east coast snobbery is behind their attacks. He points out that he went to a school in the town in Illinois where Mr Purcell now lives. “And I was a caddy at the country clubs where he now plays golf.”

Such exchanges bemuse and irritate many Morgan Stanley staff in the US, let alone those overseas for whom it is a crash course in the American class system. One Morgan Stanley banker in London says: “That they should be arguing about whether the CEO lives in New York or not beggars belief and shows just how parochial they can be.”

Some of Mr Purcell’s friends believe the attacks are very personal. They claimed vindication this week when the group of eight called on the board to replace Mr Purcell with Mr Scott, the man he in effect sacked two years ago. In 2001 Mr Purcell appointed Mr Scott as president and chief operating officer. But two years ago he stripped Mr Scott of operational responsibilities for two old Dean Witter businesses, the retail brokerage and asset management unit, because of their poor performance – poor performance for which the critics are now attacking Mr Purcell.

Mr Scott blames the performance on the bursting of the stock market bubble and the fact that the managers of the businesses continued, in practice, to report to Mr Purcell. “He kept his hands on the reins,” says Mr Scott. Either way, Mr Scott felt “humiliated” by Mr Purcell’s move and accepted a generous retirement package. This included $1.5m a year as an advisory director, from which position he is now attacking his paymaster.

Even if, as some of Mr Purcell’s friends claim, the campaign against him is Mr Scott’s revenge, others blame Mr Purcell’s abrasive personality and the lack of attention he has paid to former executives. Wall Street observers say Mr Purcell has not spent as much time keeping the former executives sweet as his counterparts at other banks such as Goldman Sachs and JPMorgan.

Last month, the group of eight, who own 1 per cent of the company’s shares, sent a letter to the board attacking Mr Purcell’s leadership. The directors investigated the allegations and interviewed all but one of the 14-member management committee about Mr Purcell’s leadership. According to a statement this week the board found “clear majority support for Phil Purcell’s leadership”.

Scott gets paid $1.5 million per year to attack his boss! Now where can I apply for a job like that?

More fun commentary here.


CEO Material

Those following the attempt by Trustee Robert Scott ’68 and 7 other ex-Morgan Stanley honchos to wrest control of the firm away from Phil Purcell have a lot of reading to do, starting with Wall Street Journal articles here and here. Video is also available. Those without WSJ access should go to the New York Times.

Under pressure from large investors to specify their plans for Morgan Stanley’s future, eight retired dissident executives of the firm proposed yesterday that one of their own, Robert G. Scott, immediately replace Philip J. Purcell as chief executive.

The unexpected move, coming a day after the firm’s abrupt proposal to spin off the Discover credit card unit, underscores how rapidly events have progressed for the battling factions since the dissidents sent their first letter to Morgan Stanley’s board a week ago.

With the removal of Mr. Purcell their primary goal, they were taken aback when he responded by forcing the resignation of two popular senior executives that they had considered potential successors to Mr. Purcell.

Now they have put forward Mr. Scott, who is a well-regarded former president of the firm but was never considered chief executive material before or after the 1997 merger with Dean Witter.

Shed no tears for Scott. He is certainly one of the dozen most successful Ephs in finance and, unlike some others, seems completely self-made.

Side note: Do self-made Ephs like Scott deserve the extra credit that we sometimes give to them over those like Herb Allen ’62 who start out at Daddy’s investment bank? Perhaps. But I am better off for having grown up with a father who loved me and taught me rather than one who didn’t but had a lot of money. But this is a topic for another day.

Anyway, since we are supporters of Scott in his efforts to oust Purcell, we should try to be helpful. [Just like you were for Anchors Away? — ed. Exactly!]

Now that Purcell has further ensconced himself, Scott and the Gang of 7 have an uphill battle. They have a web site, which is fine and dandy, but no way to bring their natural allies together. It is not enough to have a top down model in which people just contact them. They need to build a community in which current and past Morgan Stanley alums can talk, gossip and complain about Purcell.

They need a blog, with anonymous comments.

After all, the only way to get rid of Purcell is to find some serious dirt on him. That, and that alone, will force the board to act. Now, as we know at EphBlog, dirt is not that easy to find. People don’t just call you up with the goods. One person tells you X. Another tells you Y. After you publish X and Y, a third person tells you Z, something she wouldn’t have told you (or perhaps even been aware of herself) until you published X and Y.

There is a community of anti-Purcell folks out there who know where the bodies are buried. Scott and his friends need to harness that distributed knowledge.


Out of the Tar Pits

Trustee Robert G. Scott is back from the tar pits.

On the surface, the open revolt by eight retired Morgan Stanley executives against the leadership of Philip J. Purcell seems to be a power struggle, pure and simple, over who should control that storied investment house. In a larger sense, however, the attempted putsch may represent the final death rattle of a Wall Street era personified by the well-born, Ivy League-educated investment bankers who formed the core of Morgan Stanley during its heyday in the 1970’s and 1980’s.

Titans of their day, their impeccable bloodlines and easy society manners . . .

Here at EphBlog, we are still working on that “easy society manners” stuff.

If it weren’t for the blasted distractions of anchor housing, EphBlog would have been following this saga much more closely. Scott is a generous benefactor of the College. As I have noted before, his successful career in finance provides many lessons for younger (and not so young anymore) Ephs.

The dispute here — Scott and his fellow Morgan Stanley dissidents think that Purcell is doing a poor job as CEO and want him out — is too archane to be of general interest. But all good Ephs should be rooting for Scott. Although his personal fortune is already well north of $100 million, it could only be good for the College if he were to get back on the Morgan Stanley gravy train by replacing Purcell as CEO. Although Scott might not earn the $20+ million per year that Purcell now pulls in, his salary would certainly be more than enough to fund a few more Robert G. Scott ’68 professorships.

The Wall Street Journal reported yesterday that:

Shortly after Labor Day of 2003, Morgan Stanley Chief Executive Philip Purcell proposed a management change to Robert Scott, then president of the blue-chip securities firm.

Mr. Purcell wanted Mr. Scott to spend more time with clients. Mr. Scott agreed. But just before the next board meeting on Sept. 16, Mr. Scott was shocked to read material prepared for directors showing he would lose responsibility for the two businesses that reported to him.

After the meeting, Mr. Scott told Mr. Purcell he hadn’t meant to agree to those changes. At that point, a discussion of Mr. Scott’s options led swiftly — and brutally — to his forced resignation. Mr. Purcell told Mr. Scott that he could only conclude that there was “no place” for him, according to people familiar with the conversation. Mr. Purcell doesn’t dispute ousting Mr. Scott and believes he made the changes clear, a Purcell colleague says.

Great stuff. Time will tell whether or not Scott has the last laugh.


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