Morgan Stanley CEO John Mack has told senior advisers that the firm will continue to make bets in the bond and stock markets despite recent subprime-related trading losses that led to a $9.4 billion writedown in the fourth quarter, CNBC has learned.
By embracing "proprietary" trading, in which a firm invests for itself rather than for clients, Mack is sticking with a risky strategy that could result in more losses and ultimately threaten his position at the firm.
Morgan Stanley already is facing more possible writedowns of $1 billion to $2 billion in the current quarter because of the firm's exposure to bonds backed by depressed commercial real estate.
On Tuesday, Deutsche Bank analyst Mike Mayo downgraded Morgan Stanley to "hold" from "buy," citing risk taking by the firm as one of the reasons.
Mack, however, is sticking with proprietary trading because he believes that with slowdowns in mergers and acquisitions, initial public offerings and the market in general, Morgan will only be able to make money if it rolls the dice.
That seems to be opposite of what Merrill Lynch CEO John Thain is doing. Though Thain was a former president at Goldman Sachs, which all but created proprietary risk taking, he now is looking to de-emphasize proprietary trading at Merrill and put more emphasis on the steady flow of revenue from the brokerage operations, according to people familiar with the situation.
Mack's future is relatively secure now. But if Morgan has another big writedown, his position as CEO would clearly be in jeopardy. According to sources at the firm, that's why a horse race has been set up between Mack's two co-presidents -- James Gorman, a former management consultant who runs the brokerage operation, and Walid Chamma, a top investment banker.
They have been tusselling internally for attention for weeks, and vied for air time Tuesday during Citigroup's brokerage firm conference when both gave presentation.