Morgan Stanley Cuts 34 of 40 SP Pros: Overreaction?

Last week, US structured products professionals were stunned by the news that Morgan Stanley let go 34 of its 40 structured products personnel on Tuesday (April 22).

While The Street has grown accustomed to news of cuts in profitable structured products groups of the "lower" 5% to 10% of personnel (Lehman, Citigroup for example) given the deep pain most firms are experiencing as a result of proprietary subprime losses. But the Morgan Stanley news has profound reverberations and defies conventional thinking.

At first blush, it appears that the terminations involve mostly "inside" marketers -- those responsible for sales of structured investments to the former Dean Witter and Morgan Stanley private banking distribution channels. The surviving six appear to be third-party marketers, those responsible for developing new lines of business through independent RIA and regional BDs (a highly coveted group, that represents about 40% of structured products sales).

Bottom line: Morgan Stanley appears to be making a strategic decision that, internally, structured products can be still be sold effectively without the intermediation of 34 internal marketers -- but, as is often said, structured products are not bought; they are sold. The Morgan Stanley experiment will be closely watched by others with internal distribution to see if this is an astute cost-cutting move . . . or a misplaced over-reaction occasioned by its ongoing subprime woes.