The Meaning of Morgan Stanley’s Move Onto Main Street
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Masters of the universe pitch mom-and-pop investors
The most obvious conclusion to draw from Morgan Stanley’s $13 billion purchase of E-Trade yesterday is that it blurs the boundaries between Wall Street and Main Street, with an investment banking stalwart paying a big premium for a discount retail broker. Morgan Stanley’s traditional rival, Goldman Sachs, has made similar moves via its Marcus retail unit and credit-card partnership with Apple.
The chattering class:
• Eric Hagemann of Pzena Capital Management emailed our colleague Kate Kelly: “If they’re able to take out costs, then from a purely financial perspective buying E-Trade isn’t drastically worse than buying back their own stock, which is their main alternative use of capital.”
• Roger Altman of Evercore told CNBC: “Morgan Stanley has been leading the transformation from the wholesale side to the retail side, and this takes them further in that regard.”
• But Mike Mayo, a banking analyst at Wells Fargo, told Bloomberg, “After seeing so many of these marriages go afoul, we have more of a skeptical hat on.”
Who’s next? The deal is expected to stoke the urge to merge among other asset managers. After all, when commissions fall to zero, the only obvious ways to eke out a profit are via scale or cross-selling customers with a suite of fee-charging services.
• Interactive Brokers’ C.E.O., Tom Peterffy, told MarketWatch that his company held merger talks with E-Trade in November, suggesting that his brokerage could be up for sale.
• Wall Street players may also consider buying younger upstarts like Robinhood, the online brokerage that made its name with zero-commission trading, or Wealthfront and Betterment.
What about the regulators? Morgan Stanley’s takeover of E-Trade isn’t final until the Fed gives its blessing. The bank is betting that the Fed under the Trump administration is friendlier to post-crisis mergers than it was during the Obama years, when then-Fed governor Daniel Tarullo said in 2012 that there should be a “strong but not irrebuttable presumption of denial” for takeovers by big banks. Our colleague Jeanna Smialek caught up with Mr. Tarullo, now at Harvard, who he said his thinking remained the same. She sent us this snippet:
Mr. Tarullo said regulators needed to take into account the managerial capabilities of both firms, antitrust concerns and financial stability considerations. When it comes to stability, it matters both whether the merged company is more likely to run into trouble and whether such a stumble would cause broader problems because of the bank’s increased size.
“I’m sure people will make the argument that this is actually financial stability enhancing for Morgan Stanley,” he said, but it’s also a “big addition” to the banks’ balance sheet. So the challenge is combining both the arguable increase in resilience and any added systemwide costs of failure.