eFinancialCareers

Is there something silly about piling into a market a) mid-way through a boom, when staff are acutely aware of their own value, and b) in the run-up to the end of the year when everyone will expect to be bought out?

Dick Bove thinks so. In a note released yesterday, the Rochdale Research analyst accused Morgan Stanley of having a longstanding problem with timing.

Bove points to past examples of Morgan Stanley’s erratic behaviour, including charging into alternative investment at an inopportune point in the cycle and increasing its presence in housing just before the market for mortgage backed securities tanked.

According to Bove, Morgan Stanley’s recent decision to ramp up sales and trading, adding up to 400 people in the process, is a manifestation of the same deficiency.

“At present the competition for personnel and the need to pay higher fees to attract them has heated up on Wall Street. Is this the time to plunge into adding people?” he wonders.

London-based headhunters confirm that pay is getting a little frothy. Lee Thacker at Silvermine Partners recently told Financial News that pay for senior rates bankers has risen around 50% on last year.

Privately, Morgan Stanley’s fixed income business is said to be feeling shamed by the far superior performance of rivals (Goldman Sachs) and is therefore working on the premise of better late than never.

“Morgan Stanley cut too deep,” says Brad Hintz, analyst at Sanford Bernstein. “They cut muscle in governments and mortgage backed securities and are making up for that by rehiring.”

Although Morgan may have missed some of the easiest money in the fixed income markets, Hintz says the boom still has a way to run: “As long as credit spreads are coming in, yield curves are steep and there’s volatility in govies, it will be possible to do well.”

Nevertheless, Hintz says the bank most probably won’t see a return on its fixed income investment before the fourth quarter, if not 2010. In the meantime, with FICC margins already falling and Morgan Stanley’s compensation ratio already high, the danger is that the cost of hiring will erode returns – something that’s already said to be an issue at Barclays Capital.