Morgan Stanely announced today that it is giving up control of FrontPoint Partners, the Connecticut hedge fund it bought in 2006. One of the fund's senior portfolio managers is Steve Eisman, who was known for his bearish and prescient calls on the subprime mortgage business.
Morgan will take a minority stake and give FrontPoint senior management and portoflio managers a majority stake, but further terms of the deal were not disclosed. The restructuring will close in the fourth quarter of 2010.
President and CEO James Gorman said today on a conference call following the announcement, which coincided with the firm's third quarter earnings release, that Morgan Stanley would be reallocating its capital and balance sheet away from proprietary businesses in the wake of Dodd-Frank.
"Morgan Stanley remains a work in progress," said Gorman at the beginning of the call. "We are adopting a model more consistent with regulatory change emanating from the Dodd-Frank bill." He added, "These regulatory changes are real, permanent and will fundamentally change the business. Morgan Stanley is embracing the changes to position our firm to thrive in the future."
But Gorman also emphasized that Morgan began a review 18 months ago of the different asset management businesses it is in and the stakes it holds, before Dodd-Frank was signed into law. In response to questions about the "restructuring," Gorman said that Morgan Stanley feels more comfortable as a minority stakeholder than an owner because of revenue sharing agreements. "It represents a conflict to own 100 percent of hedge funds," he said.
Gorman announced in July that the firm was looking at its investments in hedge funds. Under the Volcker rule, banks must limit their investments in hedge funds, but that would not have affected Morgan Stanley's ownership of FrontPoint because the firm did not have much of its own capital in the funds, according to a Blooomberg BusinessWeek story. Morgan owns minority stakes in Avenue Capital Group and Lansdowne Partners, also purchased in 2006.