We don’t have enough fingers to keep track of all the reasons why Morgan Stanley canned Phil Purcell last week, after seven months of unrest at the onetime premier investment bank in the country. Of course, the constant drumbeat of departures played a major role in his brooming. Hardly a week went by when the business press didn’t report that this or that Morgan broker had bolted for points unknown. So did the ludicrous $1.45 billion verdict against the firm in favor of Ron Perelman in the Sunbeam fraud case, a case that Morgan, by its own admission, could have settled for $20 million. So did the simply awful quarterly results, which were so bad the company took the extraordinary step of pre-announcing the shortfall because it differed so dramatically from the guidance Purcell had laid out just a few months earlier.
But my sources inside the company say that Purcell’s fate was sealed back in April, when some inquisitive board members decided to talk to several dozen top producers at the firm after eight very senior retired execs expressed public unhappiness with moves Purcell had made. Purcell agreed to facilitate the inquiries—as long as they were conducted next to his office with the door open. What the board members heard shocked them: Few of the participants liked Purcell, and most actually had no contact with him whatsoever. Many bad-mouthed him and his imperial reign, even though they knew they were in earshot of the man. “My allegiance is to Morgan, not Purcell,” the board heard over and over again.
Now it is well known on Wall Street that Purcell never managed down, just up, catering to the board in a way that made many people—including yours truly—think that he would have to commit a homicide to lose the support of these mostly handpicked backers. I personally loathed the guy, having done about $30 million in business with his firm without ever so much as a thank-you, let alone an acknowledgment of me or my firm’s existence as a client. I was small-fry for Purcell. We were all small-fry, I later learned.
Down to the end, many board members stood by him, particularly Charles Knight, late of Emerson Electric, and Mike Miles, formerly of Philip Morris. They knew only what he told them, and he told them that all was well and the people who were departing were just sore white-shoe losers—and not of the tough-guy, Notre Dame ilk that spawned Purcell.
But two academics on the board, Laura D’Andrea Tyson, dean of the London Business School, and Sir Howard Davies, director of the London School of Economics, took the dissension seriously from the get-go. As is the case at many companies in the post-Enron era, the academics brought on the Morgan board for window dressing have become opponents of the insiders, in part because they don’t get that they were brought on to add prestige more than value or thought. Later they were joined by Robert Kidder from Stonehenge Partners, the former chairman of the Borden family of companies, and Miles Marsh, CEO of Fort James, the paper company, creating enough critical mass to stir genuine fear among the board that keeping Purcell would mean losing everybody else who mattered. These four spearheaded Purcell’s canning.
Although the defections mattered—starting with the high-profile departures of institutional favorites Vikram Pandit and John Havens, then building with the resignation of vice-chairman Joe Perella and finally reaching a crescendo with the departure of the much-loved Ray McGuire from mergers and acquisitions—it was the cost of keeping the people who chose to stay, not go, that devastated Purcell’s chances with the board. “The buying people back, the big money they had to pay to keep people who were walking around the corner without it, weighed on the firm’s results more than anything,” one insider told me. “That, plus the fact that many of the top people who did leave made a point of telling the board that they barely knew or had no contact whatsoever with Purcell.”
It wasn’t always negative for Purcell. Just eighteen months ago, Wall Streeters were marveling about how lucky Morgan Stanley was. Although the firm’s earnings had collapsed mightily along with other firms on Wall Street after the pricking of the dot-com bubble, Morgan had steered clear of the regulatory problems that had plagued almost every other major firm.
Eliot Spitzer, the New York State attorney general, had feasted on the e-mails of business after business indicating the duplicity of many senior executives. Morgan had no such e-mails; it didn’t save most of its executives’ e-mails. That may or may not have helped Morgan avoid Spitzer’s scrutiny, but it did lead to the $1.45 billion verdict in Florida in favor of Ron Perelman. A respected judge ruled that Morgan’s inability to produce records created a presumption of fraud, virtually assuring Perelman a victory in a lawsuit that Purcell had assured his board would amount to nothing important.
The decision served as a wake-up call to the board, which had come to rely entirely on the judgment of Purcell and his chief lieutenant, Donald Kempf, the 68-year-old general counsel. After the Perelman verdict came down, even Purcell’s lackeys on the board stopped taking seriously many of Purcell’s protestations that he had a handle on the firm’s day-to-day business.
Purcell told the board several months ago that things were looking up and that he expected a turn in the firm’s fortunes. When the board members saw the preliminary numbers recently, however, they realized that once again they’d been had, and that another wave of defections, including some key people who previously had pledged allegiance to Purcell, was about to hit. With that, Purcell was shown the door.
Top producers told the board over and over again: “My allegiance is to Morgan, not Purcell.”
Frankly, the brokerage business has become so terrible lately, with super-low commissions, a total lack of trading volume, and big-ticket underwritings, that it’s difficult to imagine that anyone can turn the company around quickly. While some on Wall Street were drawing Purcell parallels to Michael Eisner and Disney, the analogy’s misplaced: At least Eisner promoted Bob Iger. Purcell scorched the earth between him and potential successors, especially the affable, some would say brilliant, Pandit. To me, unless someone’s appointed soon who can either start merger talks, perhaps with JPMorgan, to resuscitate the namesake’s institution, Morgan Stanley will remain rudderless. That beats Purcell’s steering, but for now, Morgan Stanley remains a dog of a stock that’s better sold than bought.
In the end there is a Willy Loman factor on Wall Street that Purcell either forgot or never learned. Although it is not as simple as “be liked and you will never want,” as Loman says, the corollary is true: You can’t be hated by everyone and prosper. By all accounts, Purcell was hated for his intense arrogance by almost everyone who worked for him. His lack of people skills, Wall Street gibberish for “he thought he was better than everyone else,” ate him alive.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Altria (formerly Philip Morris) and JPMorgan Chase. E-mail: jjcletters@thestreet.com. Get all of James J. Cramer’s stock picks via e-mail, before he makes the trades, by subscribing to Action Alert Plus. A two-week trial subscription is available at thestreet.com/aaplus.