Zoe Cruz Fired For Mortgage Related Losses, Could the ouster of Morgan Stanley‘s co-president Zoe Cruz signal that the bank is gearing up for more mortgage pain?Morgan Stanley, its reputation battered over a recent $3.7 billion subprime trading loss, announced Thursday that Ms. Cruz who oversaw all the firm’s trading and risk operations, would retire, effective immediately. The New York Times noted that the move represents a sharp reversal for Morgan’s chief executive, John J. Mack, who had supported and cultivated her career.
And it underscores the intense pressure that Wall Street banks and their boards are now under to take immediate steps in dealing with the losses they suffered from securities tied to subprime mortgages.
Richard Bove, an analyst at Punk Ziegel, told Forbes that the timing of Ms. Cruz’s departure suggests there might be another big write-off coming for the firm, reminiscent of the scenario that played out with Warren Spector’s exit from Bear Stearns.
Mr. Spector was ousted from the bank in August following the collapse of two of Bear’s hedge funds due to mortgage-related losses. The bank, whose market value has fallen about $10 billion since mid-January, said this month that write-downs in the fourth quarter will total $1.2 billion.
The reported that Morgan Stanley is looking at fourth-quarter write-downs of at least $1 billion to $2 billion. But other analysts have put the figure at as much as $6 billion.
If Mr. Bove’s predictions are correct, Mr. Cruz’s ouster could mean the bank is looking at write-downs at the higher end of the spectrum.
Mr. Mack’s about-face related to Ms. Cruz may also be worrisome. The Times noted that just three weeks ago, immediately after the disclosure of the $3.7 billion write-down, Mr. Mack went so far as to tell executives inside the firm that not only would Ms. Cruz, 52, not be ousted over the write-down — by far the largest in the firm’s history — but that she remained a leading candidate to succeed him. That news came as a shock to many of the firm’s executives, who were distressed that Morgan Stanley, which was not a major underwriter of collateralized debt obligations, would record such a large trading loss.
As the ramifications of the loss sank in and it became clear that the firm might well have to write-down between $1 billion and $2 billion at the end of its fiscal year, dissatisfaction with Ms. Cruz began to build.
According to The Times, Mr. Mack came to the conclusion in recent weeks that the trading debacle, the building resentment over her status at the firm and the possibility of further write-downs put her in an untenable position. During this period, Mr. Mack participated in risk-control meetings more than he had done in the past.
Thursday morning, at a previously scheduled board meeting, Mr. Mack informed the board of his decision, The Times said. After the meeting, Mr. Mack broke the news to Ms. Cruz, who left the firm’s Broadway headquarters a short time later. Her departure brought to an end the career of the most senior woman executive on Wall Street and a 25-year run at Morgan Stanley, the only firm where Ms. Cruz worked.
The Times says, however, that while Ms. Cruz may have been a focus of dissatisfaction, the more aggressive approach adopted by the firm over the last two years is the responsibility of Mr. Mack alone.
After his return to the firm more than two years ago, Mr. Mack spoke publicly of adopting a higher risk profile and pushed the firm into in-vogue investment areas like subprime mortgages, lending to private equity firms and using more of the firm’s own capital to take big trading positions. The strategy produced substantial profits for a time, but also resulted in a complex and ultimately disastrous trade in collateralized debt obligations earlier this year that led to the $3.7 billion write-down.
These businesses, while lucrative for trading firms like Goldman Sachs, were outside the traditional expertise of Morgan Stanley. Now, after a $940 million write-down in the third quarter and given the possibility that the firm could write down another $1 billion to $2 billion – with $6 billion being a worst case – Morgan Stanley’s total losses for this year are coming uncomfortably close to the $8.4 billion suffered by Merrill Lynch.
While the firm has been upfront about these looming losses, they will put increasing pressure on Morgan Stanley’s board to hold its own chief executive accountable. The Morgan Stanley board has been almost completely turned over since Mr. Mack succeeded Philip J. Purcell. There is no indication that Mr. Mack’s job is in jeopardy.
As for Ms. Cruz, The Financial Times reported that before Morgan Stanley announced its losses, Ms. Cruz was approached about becoming chief executive of Merrill Lynch, a job that went to John Thain, the head of NYSE Euronext.
But while a top spot at a financial firm may no longer be in her immediate future, industry observers noted that Ms. Cruz is unlikely to say home with her knitting.
“Zoe is a very talented person,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. and a former Morgan Stanley treasurer, told Reuters. “[She] is going to be sitting on lots of boards for the rest of her life.”
And it underscores the intense pressure that Wall Street banks and their boards are now under to take immediate steps in dealing with the losses they suffered from securities tied to subprime mortgages.
Richard Bove, an analyst at Punk Ziegel, told Forbes that the timing of Ms. Cruz’s departure suggests there might be another big write-off coming for the firm, reminiscent of the scenario that played out with Warren Spector’s exit from Bear Stearns.
Mr. Spector was ousted from the bank in August following the collapse of two of Bear’s hedge funds due to mortgage-related losses. The bank, whose market value has fallen about $10 billion since mid-January, said this month that write-downs in the fourth quarter will total $1.2 billion.
The reported that Morgan Stanley is looking at fourth-quarter write-downs of at least $1 billion to $2 billion. But other analysts have put the figure at as much as $6 billion.
If Mr. Bove’s predictions are correct, Mr. Cruz’s ouster could mean the bank is looking at write-downs at the higher end of the spectrum.
Mr. Mack’s about-face related to Ms. Cruz may also be worrisome. The Times noted that just three weeks ago, immediately after the disclosure of the $3.7 billion write-down, Mr. Mack went so far as to tell executives inside the firm that not only would Ms. Cruz, 52, not be ousted over the write-down — by far the largest in the firm’s history — but that she remained a leading candidate to succeed him. That news came as a shock to many of the firm’s executives, who were distressed that Morgan Stanley, which was not a major underwriter of collateralized debt obligations, would record such a large trading loss.
As the ramifications of the loss sank in and it became clear that the firm might well have to write-down between $1 billion and $2 billion at the end of its fiscal year, dissatisfaction with Ms. Cruz began to build.
According to The Times, Mr. Mack came to the conclusion in recent weeks that the trading debacle, the building resentment over her status at the firm and the possibility of further write-downs put her in an untenable position. During this period, Mr. Mack participated in risk-control meetings more than he had done in the past.
Thursday morning, at a previously scheduled board meeting, Mr. Mack informed the board of his decision, The Times said. After the meeting, Mr. Mack broke the news to Ms. Cruz, who left the firm’s Broadway headquarters a short time later. Her departure brought to an end the career of the most senior woman executive on Wall Street and a 25-year run at Morgan Stanley, the only firm where Ms. Cruz worked.
The Times says, however, that while Ms. Cruz may have been a focus of dissatisfaction, the more aggressive approach adopted by the firm over the last two years is the responsibility of Mr. Mack alone.
After his return to the firm more than two years ago, Mr. Mack spoke publicly of adopting a higher risk profile and pushed the firm into in-vogue investment areas like subprime mortgages, lending to private equity firms and using more of the firm’s own capital to take big trading positions. The strategy produced substantial profits for a time, but also resulted in a complex and ultimately disastrous trade in collateralized debt obligations earlier this year that led to the $3.7 billion write-down.
These businesses, while lucrative for trading firms like Goldman Sachs, were outside the traditional expertise of Morgan Stanley. Now, after a $940 million write-down in the third quarter and given the possibility that the firm could write down another $1 billion to $2 billion – with $6 billion being a worst case – Morgan Stanley’s total losses for this year are coming uncomfortably close to the $8.4 billion suffered by Merrill Lynch.
While the firm has been upfront about these looming losses, they will put increasing pressure on Morgan Stanley’s board to hold its own chief executive accountable. The Morgan Stanley board has been almost completely turned over since Mr. Mack succeeded Philip J. Purcell. There is no indication that Mr. Mack’s job is in jeopardy.
As for Ms. Cruz, The Financial Times reported that before Morgan Stanley announced its losses, Ms. Cruz was approached about becoming chief executive of Merrill Lynch, a job that went to John Thain, the head of NYSE Euronext.
But while a top spot at a financial firm may no longer be in her immediate future, industry observers noted that Ms. Cruz is unlikely to say home with her knitting.
“Zoe is a very talented person,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. and a former Morgan Stanley treasurer, told Reuters. “[She] is going to be sitting on lots of boards for the rest of her life.”
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