Morgan Stanley 2001 Annual Report Download - page 8

demand across all our businesses. In a rapid reversal,
revenues declined 16 percent in 2001, presenting a real
challenge to manage costs to protect profits for share-
holders. Through a combination of reducing incentive
compensation, restructuring existing businesses and clos-
ing selected operations, we were able to reduce the
expense base in 2001 and create profit leverage for when
the economy turns.
Compensation was down 14 percent overall and was down
by a much larger percentage in selected businesses.
Headcount was down 4 percent from peak levels despite
a significant increase in headcount at Discover. Non-
compensation expenses came down throughout the year
and by the fourth quarter were 11 percent below fourth
quarter last year, excluding costs associated with our air-
craft leasing operations. Our focus on costs will continue
in 2002, and we expect to achieve further savings as we
get out of businesses with poor current economics. For
example, we closed our retail business in Japan and sev-
eral retail branches in the U.S., as well as our freestanding
retail Internet business, and temporarily halted further inter-
national expansion of our credit card business.
While reducing our cost structure, we have kept in mind that
the factors driving secular growth in financial services — an
aging population, globalization, privatization and produc-
tivity — remain in place and that growth will resume. We
therefore have balanced the need to reduce expenses with
the need to have talent in place to take full advantage of
future opportunities.
TO DO IN 2002
We continue to see the accelerated combination of firms
in pursuit of a global capital markets strategy. In the past
18 months, UBS acquired PaineWebber for $12 billion to
gain retail distribution and asset management in the U.S.,
and Chase completed its acquisition of J.P. Morgan to
strengthen its investment banking and equity business
globally. Also, Credit Suisse First Boston acquired DLJ for
$13.5 billion to strengthen its investment banking and
equity business in the U.S. As a result of these strategic
mergers, there now are about eight firms vying for leader-
ship in global investment banking and securities distribution,
some of them straining to carve out a viable market share
in a business where there is enough demand for no more
than three or four profitable competitors. This competitive
dynamic will put continued pressure on margins.
2001
2000
1999
1998
65
56
51
43
2001
2000
1999
1998
137
127
128
90
NUMBER OF FUNDS RANKED FOUR OR FIVE STARS
BY MORNINGSTAR
NUMBER OF TOP-RATED ANALYSTS WORLDWIDE
6MORGAN STANLEY ANNUAL REPORT 2001