Morgan Stanley's new president cements role as enforcer-in-chief

By Olivia Oran

NEW YORK (Reuters) - Colm Kelleher is a stickler for discipline, even when it comes to the office dress code.

In an internal risk meeting during the summer of 2010, the then head of trading at Morgan Stanley chastised colleagues for rolling up their shirt sleeves and dispensing with their jackets in the New York heat, according to a former executive. Even in the dog days of summer with no clients present, Kelleher held those around him to a high standard.

Kelleher's role as enforcer-in-chief at Morgan Stanley was solidified last month when the Wall Street firm's Chief Executive James Gorman named him president, the No. 2 spot.

With Morgan Stanley under pressure to slash jobs, assets and business lines to compensate for a decline in bond trading, Gorman needs a lieutenant who can wield the ax as well as get the firm's investment bankers, traders and wealth management advisors to work together to boost revenue.

Despite a deep affinity for Morgan Stanley's roots and traditions as a blue-blood Wall Street institution, Kelleher, a 27-year veteran of the firm, is unsentimental about change, according to current and former colleagues.

Ahead of his promotion he culled one-in-four jobs on its bond trading desk and he is shifting more operations to low-cost cities such as Mumbai in India and Budapest in Hungary as part of a two-year plan to boost profits and reboot its flagging share price.

A spokesman for Morgan Stanley declined to comment on Kelleher’s role in the bank's strategy and declined to make him available for interview.

BRASH AND OUTSPOKEN As chief financial officer of the bank during the financial crisis, Kelleher helped save it from a near-death experience by drastically shrinking its balance sheet, converting it into a traditional bank holding company to access funding from the Federal Reserve and negotiated a $9 billion investment from Japanese bank Mitsubishi UFJ Financial Group.

Given fears that the current rout in commodity prices and slow global growth will hurt bank revenues, Gorman told investors last month that Morgan Stanley needed to "control what we can control given the market realities." Kelleher, a wine buff and classical music lover, is good at maintaining control.

When he ran Morgan Stanley's bond trading division in London, he was known for aggressively tracking down traders who had lost money. Former Morgan Stanley traders recall being summoned to Kelleher's office with a call and then berated if they didn't pick up the phone right away. In his office, he would glare at them over the top of his glasses when he didn't like the answers he got.

Brash and outspoken, former and current colleagues said they could quickly tell they were in Kelleher's good books if he cracked jokes about them in public. The silent treatment was a bad sign.

Kelleher's style did not mesh well with that of the more reserved Paul Taubman, Morgan Stanley's former star dealmaker who ran the investment banking division.

The two personalities clashed and in the end Gorman chose to put the trading and investment banking arms under Kelleher, prompting Taubman to leave in 2012. Taubman declined to comment for this story.

AMBITIOUS BUT CAUTIOUS

Kelleher's ascent to the president's job marks the second time he has triumphed over an internal rival in recent years.

His promotion last month was a cue for the departure of Greg Fleming, the former head of wealth management whose aspirations to be CEO jarred with plans by Gorman, who is 57, to stay on for another five to seven years.

Kelleher is a year older than his boss, and that means he could miss out on the top spot.

While Kelleher is ambitious, colleagues say, he is a cautious operator, someone who has survived multiple leadership upheavals by keeping his head down.

“I don’t think Colm ever postured for a big job, but he knows when the other guy is going to screw up his hand,” said Jerry Wood, who ran fixed income sales at Morgan Stanley for many years and is now retired.

A father of two boys and one girl, he has been approached for top jobs at European banks Barclays and Lloyd's, according to former and current colleagues. It is unclear whether he was offered the jobs or asked if he wanted to be on shortlists. But Kelleher's loyalty lies with Morgan Stanley, where he is one of the few entrusted with an access pass to the roof of the New York headquarters in the middle of Broadway’s Theater district, allowing him to puff on a cigar between meetings. There are also pieces of art from his own collection displayed on the executive floors.

BYZANTINE HISTORY

For Morgan Stanley to compete effectively against rivals with larger balance sheets such as JPMorgan Chase & Co, Kelleher will need to encourage more cross-selling between its investment banking and wealth management arms, as well as between banking and trading teams. For example, bankers could encourage their corporate clients to originate trades and hedges with their counterparts in the sales and trading business.

He is well versed in such collaborative initiatives. When he was running investment banking and trading, Kelleher helped create a group of senior executives whose job it was to persuade the firm's biggest clients, from companies to hedge funds, to use as many of the bank's products as possible.

More recently, he has moved senior equities executives into bond trading, including naming former equities trading head Sam Kellie-Smith as the new head of fixed income in January.

Kelleher has also started rewarding employees who drum up business for other divisions. Investment bankers who, for example, introduce an executive whose company is about to go public to wealth management brokers get a bump in their compensation.

It's all a far cry from the career Kelleher once considered. A history graduate from Oxford University, he told the Wall Street Journal in 2012 that had he taken a different path, he would have become a professor, lecturing university students on Byzantine history.

Born in Ireland to a family of nine children but raised largely in England, where he is big fan of the Chelsea soccer team, Kelleher likes to pepper business discussions with references to historical and literary figures such as King Canute and Edgar Allen Poe.

When Morgan Stanley was threatened with a three-notch downgrade to its credit rating in 2012, which would have led to a big increase in its borrowing costs and may have prompted big clients to pull back from some business, he gathered his team for a pep talk.

"He talked about the house of Morgan and where the firm came from and what its values are that make it unique," said Lucas Detor, a former co-head of Morgan Stanley's distressed and U.S. leveraged loan business and now an executive managing director for investment manager CarVal Investors.

"He told people, 'I got it. We’ve come from tough places before.' And he was right." Morgan Stanley escaped with a two-notch downgrade, which was a blow but not a critical one.

Despite his steely reputation, Kelleher doesn't take himself too seriously.

At Morgan Stanley's 2005 Christmas party for the fixed income team in London, a credit salesman dressed in hot pants and a skintight vest as part of a skit to roast Kelleher, then the region's head of bond trading.

Darragh McCarthy's lampoon of Kelleher as a satirical gay character in the popular British television series Little Britain had some colleagues wondering if his career at the bank was over but his boss saw the joke.

McCarthy was promoted soon after.

(Additional reporting by Dan Freed and Anjuli Davies; Editing by Carmel Crimmins and Martin Howell)