In 2005, after his triumphant return to Morgan Stanley - the bank he had left four years before after losing a power struggle - John Mack got a call from the Tokyo office.
The senior banker on the other end of the line urged the new chief executive to strike a joint venture with one of the large Japanese banks to take advantage of their large deposit base and unparalleled corporate connections.
Four years and a devastating financial crisis later, the Tokyo office has had its way.
Morgan Stanley and Mitsubishi UFJ Financial Group (MUFG), one of the world’s largest banks by assets, on Tuesday announced a new $100bn-plus alliance to boost lending to American companies.
The circumstances that led to the partnership, which is part of a wider strategic tie-up between the two companies, are not what Mr Mack might have envisaged in 2005.
MUFG and Morgan Stanley found each in the midst of the most virulent financial storm in decades.
In October, as panicky investors targeted Morgan Stanley’s shares amid fears its business model was doomed and the bank might soon follow Bear Stearns and Lehman Brothers on the industry’s scrapheap, MUFG came to the rescue.
The Japanese’s investment in $9bn of preferred shares, which convert into a stake of about 20 per cent, helped steady the market’s nerves and offered Mr Mack a chance to tap into MUFG’s vast resources.
Tuesday’s lending joint venture, which will pool the two companies’ loans to US companies, is an admission by Morgan Stanley that having a strong balance sheet - and a willingness to use it - is crucial to winning business in the post-crisis world.
Before the turmoil, Wall Street bankers used to scoff at the “pay-to-play” model of their commercial banking rivals, arguing they used cheap loans as a loss leader for the investment banking business – a charge those banks denied.
Both Morgan Stanley and its arch-rival Goldman Sachs used to extol the virtue of their “pure” investment banking model, deal-making skills and ability to fund themselves on capital markets, even though Goldman has had a long-standing, balance sheet-sharing alliance with Japan’s Sumitomo Mitsui.
The credit crunch that accompanied the crisis altered that perspective, at least for Mr Mack.
“The world has changed. You need to have a balance sheet,” he told the Financial Times yesterday, sitting next to his MUFG counterpart Nobuo Kuroyanagi. “In the pre-crisis environment, there were times we could not win some pieces of business because we could not match what the commercial banks were offering. This alliance will go a long way towards levelling the playing field”.
For MUFG, the deal offers an opportunity to diversify away from Japan’s slow-moving economy and benefit from Morgan Stanley’s network of US corporate contacts.
“We have a large balance sheet. We have a lot of deposits - 120 trillion yen worth of deposits... this is a major source of strength for us,” said Mr Kuroyanagi. “But on the investment banking side we felt we did not have enough critical mass, especially on an international scale”.
The alliance, which builds on a previous agreement to set up a Tokyo-based securities venture, also cements MUFG’s investment in Morgan Stanley and suggests more is in the pipeline.
Mr Kuroyanagi said the two companies would explore co-operation in private banking and possible alliances between Morgan Stanley and Union Bank of California, a local lender it owns.
As for Mr Mack, he said the deal with MUFG gives his bank “tremendous credibility in the eyes of the market”.
“It gives both Morgan Stanley and Mitsubishi the ability to get deeper and broader with our client base but we are just scratching the surface: there is so much more we can do together,” he added.
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