Morgan Stanley

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One of the problems with learning from experience is that it might simply encourage new mistakes instead of old ones. Take Morgan Stanley, which has been making sensible noises lately on how it might turn the tables on its rivals. Since his return just over a year ago, John Mack can claim some progress on his empire’s trouble spots. Many would have preferred dramatic changes, such as selling the long-suffering credit card business. Recently, with risks mounting for the sector, more diverse revenue streams no longer seemed such a bad idea.

That left Morgan Stanley’s shares, at least compared with those of its peers, looking rather tempting. The argument ran that, if the bank failed to get its fair share of the recent bonanza, it at least would have less to lose on the way down. Meanwhile, better execution in retail brokerage and selective investments in such areas as leveraged finance, emerging markets and derivatives would eventually pay off, while plans to take more risk still looked conservative by sector standards.

Just as investors were starting to come round, however, the bank has raised eyebrows with its latest bolt-on acquisition. On its own, spending just over $700m on Saxon Capital, a mortgage company, is unlikely to move the needle much. As with TransMontaigne, the fuel distributor, Morgan Stanley can make a credible case that benefits to its existing businesses will eventually justify the price tag.

But while having an integrated mortgage operation has its appeal, it seems an odd time to buy a company which originates and services residential non-prime mortgages. At Saxon itself, delinquencies are rising, while other signs of a housing slowdown abound. For investors to give Morgan Stanley the benefit of the doubt, the bank will need to demonstrate with its next few deals that it is not simply imitating more successful rivals at precisely the wrong stage of the cycle.

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