Latest News Update About Peter Muller Morgan Stanley: Maybe the folks at FrontPoint Partners have hurt feelings. Morgan Stanley is about to dump about 75% of their ownership of the flagship $7B hedge fund, spurred on by new management and financial regulation.? The agreement would end Morgan's $400M 2006 investment in the fund after a year of negotiation between executives on both sides.
The FrontPoint deal has included attempts by FrontPoint executives to buy back the firm from Morgan Stanley, which purchased FrontPoint as part of a buying spree of hedge-fund assets under Morgan Stanley's then-Chief Executive John Mack.
The move is part of widespread wrestling on Wall Street with new restrictions in the financial-overhaul bill signed into law last month by President Barack Obama. While some restrictions won't take effect for years, companies are moving quickly to shake up their trading desks, private-equity operations and other businesses, out of concern that employees will bolt for hedge funds and other financial firms that won't be as affected by the curbs.
James Gorman, who became CEO on Jan. 1, has argued against taking on proprietary risks or investing in vehicles that could experience big losses, even if those businesses generate big profits in better times.
That caution is consistent with the so-called Volcker provision in the new financial-regulation legislation, which limits Wall Street banks in their proprietary trading and investments in hedge funds, private equity and real-estate vehicles.
But the Volcker rule isn't the main reason Morgan Stanley is eager to shrink its stake in FrontPoint, according to people familiar with executives' thinking. The business also hasn't proved as lucrative as expected, they said.
Executives also feel FrontPoint could better expand without being owned by a large financial firm. In some cases, FrontPoint's reputation as an independent, vocal and sometimes bearish investor has clashed with Morgan Stanley's corporate clients, these people added.
For example, FrontPoint's Steve Eisman, an outspoken fund manager known for his bearish subprime-mortgage wager, lambasted for-profit education companies at an investment conference in May. Some of the firms he criticized, and shorted by FrontPoint, were clients of Morgan Stanley. They complained to investment bankers who passed along those concerns inside Morgan Stanley, a person familiar with the discussions said.
Mr. Eisman said no one from Morgan Stanley ever contacted him about the complaints.
FrontPoint co-CEOs Daniel Waters and Mike Kelly didn't respond to requests for comment.
FrontPoint was profitable in 2007, but not in 2008, people familiar with the matter said. It went from $5.5 billion in assets when purchased in 2006 to $10 billion at its peak. Now with $7 billion, the firm needs to raise more money to meet profitability targets Morgan Stanley envisioned when it did the deal, one person said.
Talks between Morgan Stanley and FrontPoint stalled repeatedly over differences about how much FrontPoint are worth, people close to the matter said.
FrontPoint executives offered about $150 million to buy back the firm from Morgan Stanley, said people familiar with the talks. That would have triggered a painful write-down, which Morgan Stanley wasn't willing to take. Morgan Stanley currently values FrontPoint at around $350 million, one person with knowledge of the matter said.
As part of the deal being discussed, Morgan Stanley would give up the majority of its ownership in FrontPoint in exchange for preferred equity in the spun-off firm, people familiar with the matter said. The preferred equity would give Morgan Stanley a claim to a large percentage of FrontPoint's profits for five years, helping Morgan Stanley recover its initial investment.
After the five-year period, Morgan Stanley could retain a minority stake, giving it a slice of FrontPoint fees, or FrontPoint could become fully independent, the people familiar with the talks said.
Morgan Stanley could decide the fate of PDT, the proprietary-trading operation run by Peter Muller, in the next few months, a person familiar with the matter said. The two most likely options are to spin off PDT off into a separate investment firm or move the trading desk to Morgan Stanley's investment-management division, where it would take outside money from clients but still be owned by Morgan Stanley. s
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