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Morgan Stanley Places Defense Up Front

When Morgan Stanley (MS) appointed James Gorman, an ex-retail broker with a consulting background, to succeed chief executive John Mack earlier this year, many took it as a sign of the times that sales and trading was about to play a backseat role in the firm's future. Gorman could not have been a more different choice for the job than Mack, who hails from the rough, foul-mouthed, think-on-your-feet world of bond trading.

Now it appears -- on the surface, at least -- that there is further evidence of Morgan Stanley's transition into a more operations-focused bank, with multiple new appointments. Colm Kelleher, the firm's chief financial officer, along with investment banking head Paul Taubman will take charge of Morgan Stanley's institutional securities unit, it was announced earlier today.

In addition, the firm's chief administrative officer Thomas Nides will get bumped up to the position of chief operating officer, while Mitch Petrick, head of sales and trading, will resign his position at the end of the year.

At first glance, it seems the new administrative-biased personnel shake-out could not be a clearer indication that the bank is moving away from the unregulated, eat-what-you-kill culture that Frank Partnoy colorfully detailed in the New York Times bestseller Fiasco, where annual parties at the firm consisted of long weekends shooting clay-pigeons with automatic shotguns and the office floors were stuffed full with "half-wolf, half-geeks."

But it would be a mistake to expect Morgan Stanley to move away from designing and marketing the kind of mega-complicated financial instruments that led to the subprime fallout: those are, after all, extremely profitable activities. Rather, it appears that Gorman is preparing the top level of the firm precisely so that the firm can get away with the same kinds of activities it did in the 1990's and 2000's.

The new personnel appointments are nothing to do with becoming more defensive with risk in general (as many have thus far incorrectly pointed out); instead, they are everything to do with shielding the firm from being over-scrutinized by government officials in what is becoming an increasingly risk-intolerant regulatory landscape. And in the event that the firm does get hauled up for doing something that falls foul of the bureaucrats, it has a bunch of guys on the front line who speak the same language.

This strategy also gels well with Morgan Stanley's plans to embrace the securitization business, for which it is on a hiring binge right now.

Earlier this year, I pointed out that by spinning its proprietary trading division off into a secular, hedge-fund-like vehicle, and transferring some securities activity over to Tokyo, Morgan Stanley was effectively dodging the gaze of regulatory officials (you can read the story here). Appointing grey-suited back-office executives to the firm's hierarchy is part of the same magic trick: the firm may not appear on the surface as if it is in the business of manufacturing potential financial weapons of mass destruction, but that's exactly what it's doing.

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