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Who Needs Volcker?: The verdict is in on Morgan Stanley's (MS) weak first quarter, and it's a rousing thumbs down. The Wall Street giant's shares fell 5.4% Thursday after it reported disappointing results and a sharp drop in trading activity. Bond-trading revenue fell 42% and stock-trading revenue 19%, according to the company. The news arrived at a time when Wall Street is supposed to be shifting away from risky trading. That's the theory, anyway. Among all financial firms that have reported first quarter results, revenues were up smartly for trading (41%) and investment-banking (43%), while there was a contraction in the core commercial-banking activities of deposit-taking (-26%) and lending (-1.5%), according to the Wall Street Journal. Morgan Stanley—whose Chief Executive James Gorman actually is seeking to play down trading and play up wealth management—appears to be stuck somewhere in the middle. It's "like a team changing sports, and the sport they are leaving didn't do so well, but the one they are going to did," Chris Grisanti, the owner and co-founder of Grisanti Capital Management (and an owner of Morgan Stanley shares) told the New York Times. "However, I think now there is some doubt in the market about their ability to make this transition." On the bright side, Gorman's wealth management push showed progress. Morgan Stanley's wealth management unit posted pretax income from continuing operations of $597 million, up 48% year-on-year. The money management business is one where the company will be joining a crowded field of players. Virtually the entire Street has concluded that docking clients for fees like clockwork is a more sustainable business model in today's environment than running a casino in the hope that someone other than regulators shows up. Richard Bove, the outspoken bank analyst now with Rafferty Capital Markets, interpreted Morgan Stanley's results and the market's reaction as reflective of broader doubts about Gorman's grand strategy. "Most investors are unhappy with the fact this company was not able to grow its trading activity as much as its peers and as a result they perceive there is a significant problem at the company," he said. Especially galling, perhaps, is that Citigroup—a brokerage joint venture partner that Morgan Stanley is in the midst of buying out—posted surprisingly strong Q1 results on the back of bond trading and investment banking. New York Times, Wall Street Journal, Bloomberg

Fuggedaboutit: Remember the financial crisis? Some observers have gone so far as to suggest that wrongdoing among bankers might have played a role. It's a concept that hasn't gotten much traction at the Securities and Exchange Commission or Department of Justice, critics charge. New York Times' columnist Gretchen Morgenson in a recent piece called on newly installed SEC chief Mary Jo White to ramp up crisis-era investigations and whistle-blower complaints that are now approaching their five-year statute of limitations. Not likely, according to Bloomberg. It reports this morning that White's self-professed "bold and unrelenting" enforcement program won't be focusing on that musty financial crisis stuff (although a few cases are still in the works). As evidence, the news service points to White's vow during her Senate confirmation hearing to concentrate on high-frequency trading and accounting fraud. White apparently doesn't buy the notion that Sarbanes-Oxley took care of the balance sheet shenanigans, as advertised. She has supporters. Inspections of auditors "repeatedly show an amazing lack of professional skepticism by accountants who repeatedly defer to very questionable applications" of the industry's accepted accounting principles, James Cox, a securities law professor at Duke University, told Bloomberg.Bloomberg, New York Times

Wall Street Journal

When financial officials print money, it's got to go somewhere. That's led to a lot of hand-wringing lately about whether, in cleaning up the last financial crisis, the Federal Reserve is setting the stage for the next one. The Journal reports top financial regulators are now concerned that mortgage real-estate investment trusts pose a potential risk to the U.S. financial system. The Financial Stability Oversight Council next week is expected to cite mortgage REITs as a source of market vulnerability in its annual report, a distinction that could result in stricter oversight, the Journal says, citing people familiar with the matter. Mortgage REITs, publicly traded financial companies that borrow funds to invest in real-estate debt, have enjoyed a quadrupling of assets since 2009 to more than $400 billion. Unlike traditional REITs, they invest in mortgage debt rather than in actual real-estate, like office buildings or shopping malls. The firms take advantage of inexpensive, short-term borrowing to buy mortgage securities backed by Fannie Mae and Freddie Mac and offer returns to investors of as much as 15%. They join leveraged loans and money-market mutual funds as areas of risk cited by senior financial regulators.

Comptroller of the Currency Thomas Curry is feeling the heat. That recently prompted the career regulator to resort to a time-tested bureaucratic tactic: he wrote a memo. In a March staff missive obtained by the Journal, Curry described as "absolutely unacceptable" JPMorgan's (JPM) failure to hand over to the OCC complete information about its "London Whale" losses. He also blasted the OCC's staff for failing to ask probing questions or demand information. The memo illustrates how, a year into the job, Curry faces a firestorm of criticism that the OCC has failed to overcome its soft-on-big-banks rap and done a lousy job policing them, the Journal says. "Many of the flubs preceded Mr. Curry's tenure, but the regulator has nonetheless earned the enmity of some powerful forces on Capitol Hill, including Sen. Elizabeth Warren (D., Mass.)," it writes. Said Curry to the Journal: "We need to rethink how we supervise, make sure it's effective.…I want the public to know the OCC is on the job and that there'll be effective and meaningful supervision." Sounds good. Now the comptroller just has to get his staff to walk the walk.

Financial Times

Exciting news. Macro economists are getting ready to argue. In this case over UK fiscal and monetary policy. The dustup surrounds a planned visit from International Monetary Fund officials who, according to the Financial Times, are expected to wag their fingers at British policymakers for imposing austerity measures as they try to whittle down the nation's mammoth budget deficit. Chancellor of the Exchequer George Osborne is said by aides to be prepared to "aggressively" defend his policies when an IMF team arrives in London, the FT reports. The controversy is part of a broader global-macro tussle about when developed countries should prioritize deficit-cutting and when slow growth justifies easy money policies. Osborne believes the IMF's expected criticism of his austerity platform, known as Plan A, is part of a proxy attack on tight-fisted U.S. Republicans, according to the FT. The chancellor believes that "Keynesian" IMF officials, including David Lipton, a former Obama adviser who is now the first deputy managing director, and chief economist Olivier Blanchard and are winning an internal argument at the fund. Those Keynesians are likely to get a warmer reception in Japan, where easy-money officials appear intent on outdoing U.S. Fed Chairman Ben Bernanke—and where tension is mounting over concerns thatJapan is intent on pushing the yen down and exports up in a beggar-thy-neighbor strategy that threatens to set off a currency war.

New York Times

Just when you thought the world was safe from Wall Street, the Times reports the very banks that a half-decade ago brought world finance to its knees with risky amalgams of mortgages and loans are busily reviving the same types of investments. Among them: collateralized debt obligations. The revival underscores how these investments, known as structured financial products, have largely escaped new regulations that were supposed to prevent a repeat of the last financial crisis, writes the Times. "All of this seems like a fairly quick round trip," says Manus Clancy, a managing director at commercial real estate research firm Trepp. "You are seeing a fair number of sins being forgiven."

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