Senior managers at Morgan Keegan & Co. argue that their restructuring moves last week are a break with the past — and a sign that the securities unit still has a future with its parent company, Regions Financial Corp.
Morgan Keegan combined its fixed-income and equities businesses into a single investment banking division, undoing a model that had lasted for more than 40 years. In doing so, they said investment banking would become a bigger part of the business mix as the Memphis firm seeks to move beyond litigation tied to its mutual fund operations, revenue declines and other lingering issues.
Speculation has persisted that Regions, which is trying to overcome credit quality and other problems unrelated to Morgan Keegan's, might sell the problematic securities unit.
But Robert Baird, a longtime Morgan Keegan executive who was named president of the investment banking division, said Regions was actively involved in the changes, though affording the independent-minded unit some autonomy.
"Regions has confidence in our team," Baird said in an interview.
Morgan Keegan's executive committee got "the encouragement and blessing" of Regions' senior management, including that of O.B. Grayson Hall, who is to become chief executive of the Birmingham, Ala., company next week, Baird said. "We have been allowed to operate in a way that we feel works best for all parties," he said.
Analysts have long wondered whether Morgan Keegan could thrive under Regions' ownership, which began nine years ago. Such concerns intensified in 2006, when C. Dowd Ritter became Regions' CEO and again in 2008 when Morgan Keegan CEO G. Douglas Edwards abruptly resigned.
Analysts such as Christopher Marinac at FIG Partners LLC have suggested that Regions could divest the unit if it needs to gain capital to leave the Troubled Asset Relief Program. All the while, Ritter and now Hall have touted the unit's prospects for helping Regions rebound.
"We continue to gain confidence in our ability to grow our business at Morgan Keegan and to deliver consistent and improving profitability," Hall said in January.
The parent and subsidiary have managed to coexist despite a rocky operating environment Regions lost $1.03 billion in 2009 due largely to rising credit costs. Morgan Keegan earned $90 million last year, but its revenue fell 4%, with declines in most business segments.
Baird said Morgan Keegan's fixed-income operations, with a focus on public finance and corporate debt, fared better than equities, which concentrates on mergers and stock issuance. "Slower" activity on the equity side during the financial crisis and recession led the executive committee to finally approve the combination, he said.
A major problem with the old model was a lack of communication. Fixed-income bankers had not been consistently pitching equity products, and their counterparts in equities were missing out on chances to promote debt components. "A more holistic calling effort for our clients should generate more revenue opportunities," said Baird, who had previously overseen fixed-income capital markets.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, called the move "intriguing." Steering commercial bank clients to a single division within Morgan Keegan should be easier for Regions, he said. "We're also at an interesting point in the cycle," with interest rates expected eventually to rise, he added. "Maybe they think the move will allow for a smooth handoff at some point to equity" dealings.
Morgan Keegan is still dealing with fallout from mutual funds that suffered significant declines during the housing crisis due to investments in mortgage-backed securities. Investor losses prompted more than 400 claims through the Financial Industry Regulatory Authority. The company said roughly half of the 82 cases that have gone to arbitration have been dismissed and $9.7 million in damages awarded out of the nearly $50 million sought. Another 121 cases have been abandoned by claimants before a hearing. Still, legal expenses at the unit rose 44% last year from a year earlier, to $161 million.
Regions sought to stem the bleeding in 2008 by transferring management of seven funds to Hyperion-Brookfield Asset Management Inc., which subsequently liquidated and closed three open-end bond funds. In January 2009, Regions sold its remaining 11 RMK Select Funds to Pioneer Investment Management.
Baird, however, said the effort to focus attention and resources on investment banking has helped Morgan Keegan look past the RMK funds issue, both internally and externally. "I have received several comments in the last couple of days from people saying it is nice to see some positive news in the face of all the negative news associated with RMK," he said.