Today marks a significant changing of the guard in the management of Morgan Stanleys municipal group as industry honcho Andrew Garvey begins his first day as head of the tax-exempt securities department.
Garvey, previously a managing director in the department, will inherit the groups top position from 20-year Morgan Stanley veteran William OKeefe, who stepped down today but will continue to work with the group until the end of the second quarter.
The move was expected before chairman Philip J. Purcell announced high-level management changes on Tuesday in a public effort to boost the firms strategic outlook and its overall financial performance. The top management changes came in response to rising pressure from former Morgan Stanley executives who sent a letter to the firms board with concerns about Purcells performance as chairman.
Mark Lake, a spokesman at the firm, said OKeefes retirement is totally unrelated to Purcells changes at the management level.
With Purcells reorganization, the most immediate impact on the municipal bond department comes with the appointment of Zoe Cruz, formerly the head of fixed income, as the firms new co-president on Tuesday. Cruz was named co-president of the firm along with Stephen S. Crawford, who was most recently the chief administrative and risk officer. Neal Shear, former head of Morgans commodities business, is the new head of fixed income.
With the new internal management structure, Morgan Stanley is expected to expand its overall trading business, which remains one of the firms key profit centers.
In an interview last week, Garvey who is prominent in the municipal bond industry and is widely recognized for his derivatives expertise said in taking the reins from OKeefe: The change is not a change in our strategic direction. Our strategy remains the same.
The firm will continue to focus on clients that have complex problems and large capital needs, he said.
We believe the municipal business is a growth business, he added, noting that the market comprises of products other than long- and short-term debt. It also includes financial products and reinvestment instruments, such as repurchase agreements and forward supply agreements, Garvey added.
Garvey has been one of the industrys leaders in derivatives and has helped to elevate the firms position in that market, especially in recent years. He noted that in the municipal market, the client base of issuers and investors are increasingly sophisticated and educated around the benefits and risks of using interest rate swaps and financial products. Garvey expects the use of derivatives to continue to climb.
Clients are using them to manage and hedge interest rate risk, he said, adding that they are using them to protect against both rising and falling interest rates.
UPWARD MOVEMENT
Garvey was hired by OKeefe at Morgan Stanley in 1999 as managing director and co-head of the capital markets group after he was lured from the fixed-income derivatives group at Lehman Brothers. OKeefe joined Morgan in 1985, after working as a trader for the former William E. Pollock & Co.
Garvey started as a summer associate in public finance at the former PaineWebber in 1985 and joined the firm as an associate public finance banker the next year. In 1992, he joined Lehmans derivatives group as that department was evolving and marketing exotic instruments to the bond market, such as interest rate swaps, tender-option bonds, and reinvestment products.
Derivatives have grown substantially in the municipal market since Garvey honed his skills at Lehman and competing investment banks have been staffing up to match the demand for the products.
Stanford Ladner, partner in the New York office of Fulbright & Jaworski LLP, said in an interview last week that derivatives have evolved considerably since the early days of the Orange County debacle. Today its downright mainstream. Long-term swaps have become almost standard. Its been an incredible turnaround, but over a long term, he said.
Orange County declared bankruptcy in 1994 after it sustained losses following its former treasurers investments in a risky form of derivatives that bet on the direction of interest rates.
Ladner noted that interest rate swaps have become more prevalent. To that end, firms active in the municipal market are building their expertise in that area. Years ago, he said, the idea was if we can do this, we can make more money. Today if they dont have it, they may lose basic bond business.
He said that if firms both smaller regional and major entities do not have derivatives capabilities, they are working like crazy to get it. There is a concern that they cant compete without it. They would be at a competitive disadvantage, Ladner added.
Ladner, however, said he had mixed feelings on the education front. There are responsible issuers, CFOs, and treasurers who understand the products, he said, but it has to be agreed to by a governing body affiliated with the issuer.
I wonder if theyre willing to do it because there are safety in numbers just like some [governing bodies] were not willing to do it after the Orange County debacle because many decided to stay away from the market, Ladner said.
COMPETITION
Morgan Stanleys main competitors in the municipal market are number one ranked UBS Financial Services Inc., which served as lead manager on 823 issues totaling $46.28 billion in 2004. Citigroup Global Markets Inc. took second place, serving as lead on 647 issues totaling $44.8 billion. Merrill Lynch & Co. rounded out the top three as it served as lead on 297 issues totaling $27.15 billion, according to figures from Thomson Financial.
The competitive landscape is expected to remain strong as firms vie for the top position. Stan ONeal, chairman, chief executive and president at Merrill Lynch, said a year ago that the firms goal was to become the number one brokerage firm in the municipal industry.
According to figures from Thomson Financial, Morgan Stanley in 2004 ranked seventh in the senior municipal underwriter category, down three places from the previous year. The firm served as lead manager on $19.28 billion through 241 issues. In 2003, it ranked fourth with $26.52 billion through 274 issues.
Going forward, Morgan will also continue to build on its trading expertise, according to Garvey. Morgan Stanley is a leading global investment bank with industry leading capital markets capabilities, interest rate swap capabilities and strong retail distribution, he said.
In a report released earlier this week on Morgan Stanleys management reshuffle, UBS said: We actually think having a head of fixed income at the top is strategically sound. Given Morgans pressured return on equity, slower book value growth, and risk of further key strategic management losses, we continue to see limited upside in the shares, and rate the stock Neutral 2, the report said.
Richard X. Bove, analyst at Punk Ziegel & Co., said in a report, We believe that the best business that Morgan Stanley [has] is in trading. We are convinced that this business is a genuine growth activity and serves the largest market in the world. The new moves at Morgan Stanley re-affirm its commitment to expand this activity and perhaps take more proprietary positions. This is a major plus. Bove worked as an analyst 20 years ago at the former Dean Witter, which merged with Morgan Stanley in 1997.
As the municipal groups new head, Garvey will continue to report to global co-heads of the interest rate and currency group, Phil Newcomb and Sean Notley, who both report to Shear, the new head of the fixed-income business.
In the management ranks, Cruz and Crawford replaced Vikram S. Pandit, former president of the institutional securities business, and John P. Havens, former head of the institutional equity business.
In a separate personnel change, Jeffery Seubel, executive director in the health care group, will retire in mid-April after five years with the firm. Seubels responsibilities will be assumed by other members of the 16-member group, which is headed by David Ertel and Tom Whalen. Morgan Stanleys Lake said that Seubels retirement was voluntary and has nothing to do with the other management changes at the firm.
