Five Tasks for Morgan Stanley's New CEO - TheStreet

Five Tasks for Morgan Stanley's New CEO

John Gorman has barely started his run at the top of Morgan Stanley but he's already got plenty of challenges ahead of him as the company preps for the release of its fourth-quarter results.
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) -- James Gorman, who took over the CEO job at

Morgan Stanley

(BAC) - Get Report

from John Mack at the start of the year, was spared the bruising publicity that preceded the appointment of his

Bank of America

(BAC) - Get Report

counterpart Brian Moynihan but he won't be able to fly under the radar forever.

After all, the 51 year-old Australian arguably has just as much to prove as Moynihan, and he'll be front and center on the company's conference call with Wall Street analysts on Wednesday morning after Morgan Stanley reports its fourth-quarter results prior to the opening bell.

The current consensus estimate of analysts polled by

Thomson Reuters

is for a profit of 36 cents a share in the three months ended in December on revenue of $7.8 billion. Here's a look at some of what we think will be keeping Gorman busy in the months and (hopefully for him) years to come:

1) Articulate a Strategy


Coming out of the financial crisis in the fall of 2008, Morgan Stanley played it safe. It shrunk its balance sheet and did not take many risks with its capital. Instead, the company focused on growing deposits and plodded along in steadier businesses like money management.

That conservatism left Morgan Stanley flat-footed at the start of 2009, as rivals like

Goldman Sachs

(GS) - Get Report


JPMorgan Chase

(JPM) - Get Report

took more risk and earned bigger returns.

Morgan Stanley stepped up hiring in the middle of the year, and showed better trading results in the third quarter. Still, it has to erase the impression that it is just following the latest quarterly fad when deciding how much risk it wants to put on its books.

2) Stabilize Smith Barney


Before Morgan Stanley bought its majority 51% stake in the Smith Barney money management unit from


(C) - Get Report

, the business was already seeing a steady outflow of brokers, who were taking billions in client assets with them.

Morgan Stanley, which has now had control of the business for more than six months, says attrition is slowing, but numbers speak louder than words, and the success or failure of this business will be fairly easy to measure, so Gorman had better get it right.

Most likely, he will. Gorman is a well-respected wealth management executive, having run

Merrill Lynch

's high net worth business for several years. Still, because fixing Smith Barney is considered an easy task for him, he won't get much credit for doing it. If the business is not successful, however, it will be difficult for him to pin the blame on someone else. The stakes will only go up as plans for Morgan Stanley to eventually buy the rest of the unit from Citigroup were announced in September 2009, although the timing of the transaction has yet to be established.

3) Keep Investment Bankers and Traders Happy


The so-called institutional business is at the very core of Morgan Stanley. That moniker refers to two separate, but related activities. There are the investment bankers, who advise companies on making acquisitions, selling businesses and raising money, and then there are traders, who do business with giant pension funds, endowments, mutual funds and other institutional money managers.

Neither of these activities are central to Gorman's experience. He could not have been named to lead Morgan Stanley if he didn't have substantial support from the company's ranks of traders and investment bankers, but because he hasn't spent much time in the trenches with the executives who run these divisions, they could turn on him quickly if things start to go south.

4) Extend and Diversify Funding


While Morgan Stanley has a proud tradition as one of America's strongest companies, it too almost went poof last year. A big reason it nearly disappeared is that it, like many other companies, including Goldman,

Lehman Brothers


Bear Stearns


CIT Group

(CIT) - Get Report


General Electric

(GE) - Get Report

, relied too heavily on issuing short term debt to keep its lights on.

Morgan Stanley took several steps to restore the confidence of its investors, creditors, and clients. It became a bank holding company subject to oversight by the Fed. It got a $9 billion investment from giant Japanese bank

Mitsubishi UFJ

(MUFG) - Get Report

. It has been shrinking its balance sheet and growing deposits.

Still, regulators are expected to push Morgan Stanley, Goldman, and even more traditional deposit-oriented banks like JPMorgan and Citigroup to issue longer term debt and take other steps to prevent a repeat of 2008. Gorman has a new CFO, Ruth Porat, to help him tackle these issues. She appears to be well-qualified for the task, but it is highly technical, and Gorman comes off as more of a salesman than a number-cruncher. He is unlikely to be the first to know if there is a hole lurking on Morgan Stanley's balance sheet.

5) Beat Goldman!

It is hard to believe there was a time when Goldman and Morgan Stanley were an even match, but it wasn't that long ago. Goldman pulled away by building itself into a trading powerhouse, and creating a corporate culture that is the envy of the financial services industry.

The intense public hatred that has been directed at Goldman has created an opportunity for Morgan Stanley. It appears to have already won some

We're Not Goldman

business from clients, including the U.S, government, but there is a chance to do much more than that. Few expect Gorman to bring Morgan Stanley back even with Goldman in the investment banking derby, but if he pulls it off, he will go down in history as one of the greats of the industry.

The rivalry is

heating up already

as the companies recently did a bit of jockeying over who would report their fourth-quarter results first. Gorman's tenure at the top is off to a good start so far, using Morgan's stock performance vs. that of Goldman as a benchmark.

Granted it's a small sample size, but year-to-date 2010, Morgan shares have risen nearly 6% through Wednesday's close vs. a decline of 1.2% over the same period for Goldman. Of course, the fourth-quarter reports will have everything to say about where the stocks go from here, so check the ticker Thursday afternoon for a better indication of investors think has the upper hand.


Written by Dan Freed in New York