Man Without Qualities

Wednesday, June 15, 2005

Understanding The Business?

Andy Kessler scribes an interesting item on what's left at Morgan Stanley following the demise of its problematic CEO. Mr. Kessler's article seems to include some real insights. But then there's this:

Morgan Stanley is still Morgan Stanley: ... it owes $1.45 billion to Ronald Perelman for bad advice on Sunbeam grills and Coleman coolers. .... I spent five years of my life at Morgan Stanley ....

One of the most profitable businesses on Wall Street is investment banking, which is not terribly complicated. A few folks in gray flannel Armani suits help corporations tap the stock and bond market for expansion capital or to buy other companies whole, and charge exorbitant fees of tens of millions of dollars. ...

Then a jury in Florida went and awarded Mr. Perelman $1.45 billion for bad advice he received from Morgan Stanley. All of a sudden, this great business is a huge liability. Billions for bad advice . . . where do I note that on the balance sheet?
Mr. Kessler says he worked at Morgan Stanley for five years, and I believe him (and the Journal). And lots of people snicker that investment bankers are under talented and over paid - their own lawyers are particularly prone to saying such things behind the bankers' backs, for example. But how the heck to explain Mr. Kessler's misidentifying Morgan Stanley's client and the entire nature of Mr. Perelman's action against the firm? Contrary to what Mr. Kessler writes, no jury in Florida went and awarded Mr. Perelman $1.45 billion for bad advice he received from Morgan Stanley. Morgan Stanley did not advise the seller (Mr. Perelman) or what was then his company, Coleman, in Subeam's acquisition of Coleman. Morgan Stanley advised the buyer - Sunbeam. And the Florida jury didn't award damages against Morgan Stanley for "bad advice" - it awarded those damages for facilitating Sunbeam's actual fraud in misrepresenting its own condition. That condition mattered because Mr. Perelman received over valued Sunbeam stock for Colemen.

As noted in the Journal's own article of April 20, 2005:
Mr. Perelman is suing Morgan Stanley for its role in the 1998 transaction. The big firm advised Sunbeam on the deal, and Mr. Perelman is alleging Morgan Stanley hid from him and other investors Sunbeam's accounting woes in pursuit of big investment-banking fees. Not long after Mr. Perelman sold his stake in Coleman for approximately $1.5 billion, including $680 million in stock, Sunbeam became engulfed in an accounting scandal, driving down the value of Mr. Perelman's stock. His suit cuts to the heart of a key issue facing Wall Street: What is the responsibility of an investment banker in identifying problems at a client, and to whom is the underwriter responsible.
What am I missing? How could Mr. Kessler make such mistakes? How could his editor at an excellent paper like the Journal let him make such mistakes?

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