Wednesday, August 13, 2008

Five Lessons from Sub-prime Crisis

PHILIP J. PURCELL, FORMER CEO AND CHAIRMAN OF MORGAN STANLEY, proposed the big five lessons for bankers coming out of the current Sub-prime crisis of the US.

For the record, during Mr. Purcell's tenure as CEO at Morgan Stanley for eight years the firm attained following milestones at the close of 2004:
#1 in global equity trading
#1 in global equity underwriting in 2004 for first time since 1982
#1 global IPO market share in 2004
#2 in global debt underwriting in 2004, with steady gains since late '90s
#2 in completed global M&A in 2004
Mr. Purcell resigned from Morgan Stanley in 2005, and has since founded a private equity firm called Continental Investors LLC.

Following are the 'lessons' that he recently discussed through an article in FT:

i) profits matter more than revenues (sales)

ii) compensation should be based on profits, margins and return on equity over time, not current year revenues

iii) leverage works not just on the upside but on the downside as well

iv) diversified and recurring revenue streams not based on trading or principal investing have immense value in a down cycle

v) risk management should become a board-level responsibility, with appropriate committees meeting regularly with management

[Related post: Sub-prime Crisis for Dummies]
[Go here for the Financial Times article where Mr. Purcell explains each in more details.]

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