WEBVTT - John Mack on Banking Risks 0:00:00.280 --> 0:00:02.600 So, John Mack in your book Up Close and All End, 0:00:02.680 --> 0:00:04.720 you talk about your experience with Morgan Stanley, but also 0:00:04.720 --> 0:00:06.640 a Credit Suite. Right, you had a period of time 0:00:06.720 --> 0:00:10.200 running Credit Suez. You're pretty explicit about some challenges that 0:00:10.240 --> 0:00:12.280 they had a Credit Swees when you were there. Now 0:00:12.320 --> 0:00:14.800 we have Credit Sweets that basically is going out of business, 0:00:14.800 --> 0:00:17.360 going to merge with ubs. What is it about Credit 0:00:17.360 --> 0:00:19.920 Suite that has given them so much difficulty? Oh more 0:00:20.000 --> 0:00:23.560 so much time? Well, I think the transition from being 0:00:23.840 --> 0:00:29.040 a Swiss private bank to a publicly held bank, that 0:00:29.160 --> 0:00:33.240 the rules and reporting have changed. I mean the Swiss banks. 0:00:33.280 --> 0:00:35.640 I remember years ago when I was there, you could 0:00:35.680 --> 0:00:38.320 go down in their vaults. He would see pieces of 0:00:38.440 --> 0:00:41.680 art locked up, things like that, And I think they 0:00:41.720 --> 0:00:44.560 had a real advantage of bank secrecy. They had a 0:00:44.640 --> 0:00:47.879 lot of people around the world who wanted to be protected. 0:00:47.960 --> 0:00:49.760 We put money in there and knowing it would be 0:00:50.159 --> 0:00:53.960 secure or safe and secretive. And the world's changed, and 0:00:54.000 --> 0:00:55.960 that's what they're dealing with because they need to change 0:00:56.040 --> 0:00:58.440 with it. Were you trying to change Credit Swie affair 0:00:58.440 --> 0:00:59.840 amount when you were there and you made a friend 0:00:59.880 --> 0:01:02.320 of changes, but the board didn't always like it. I 0:01:02.320 --> 0:01:04.319 mean they said they had some choice words for you, 0:01:04.400 --> 0:01:07.120 like arrogant. You had some choice words for them as well. Yeah, 0:01:07.360 --> 0:01:09.559 they said I'm the most arrogant person they ever met. 0:01:10.920 --> 0:01:13.440 And I said that the stupidest people I've ever dealt with. 0:01:13.920 --> 0:01:17.319 So we had a great relationship. As soon as my 0:01:17.400 --> 0:01:19.720 contract was up, they shot me. So it was fine. 0:01:19.920 --> 0:01:22.280 But when when you say stupid, what didn't they get 0:01:22.520 --> 0:01:24.039 from your point of view? I mean, you've spent a 0:01:24.080 --> 0:01:27.120 lifetime in banking, you know, banking. What didn't they understand? 0:01:27.160 --> 0:01:30.520 You need to build financial service business built on trust 0:01:31.240 --> 0:01:35.720 and built on not hiding money or putting money in 0:01:35.720 --> 0:01:37.800 different spots. But you need to be opened. You need 0:01:37.840 --> 0:01:40.600 to give a return on the investments or the assets 0:01:40.720 --> 0:01:44.399 someone gives you, and just having bank secrecy is not enough. 0:01:44.440 --> 0:01:47.120 And I don't think they got that. And for years 0:01:48.240 --> 0:01:50.680 the Swiss was a haven for people all over the 0:01:50.720 --> 0:01:53.680 world who wanted to put money away. They did and 0:01:54.360 --> 0:01:55.960 you know, for those who are putting the money in, 0:01:56.000 --> 0:01:58.960 it made a lot of sense. But long term, I 0:01:59.000 --> 0:02:02.200 think it really helped hurt the Swiss banks in a 0:02:02.240 --> 0:02:05.160 competitive way. They weren't as competitive they should have been, 0:02:05.600 --> 0:02:08.440 and they're great banks. They just needed to open up 0:02:08.440 --> 0:02:10.639 a vault a little more and not be so secretive. 0:02:10.800 --> 0:02:12.440 It looks like it we're in for a new era 0:02:12.560 --> 0:02:16.639 now as UBS is slated to take over credit swies 0:02:16.680 --> 0:02:19.600 to purchase at a bargain rate, and Calm Color, somebody 0:02:19.639 --> 0:02:21.240 you know well worked for you, is going to take 0:02:21.240 --> 0:02:23.800 it over. What do you expect Calm Color and UBS 0:02:23.840 --> 0:02:26.520 to do with credit Swies? Well, I think they'll look 0:02:26.680 --> 0:02:29.000 number one or are They're overlaps and there'll be a 0:02:29.000 --> 0:02:31.960 lot of overlaps, and you want to get the best 0:02:32.000 --> 0:02:36.720 people from each institution and still have those lines of businesses, 0:02:36.760 --> 0:02:40.640 but with a better rolodecks of who are the talent 0:02:40.680 --> 0:02:43.120 to people into the two banks. So I see it 0:02:43.240 --> 0:02:45.720 business as usual. But I think it will be a 0:02:45.800 --> 0:02:49.200 smaller institution when they put them together, and I think 0:02:49.240 --> 0:02:53.640 they will focus on performance, not just bank secrecy. You've 0:02:53.639 --> 0:02:56.520 spent a lifetime managing risk, knowing when to take it 0:02:56.560 --> 0:02:59.679 when not to take it right, Well, is it likely 0:02:59.720 --> 0:03:02.200 they'll take less risk? Already? We've had calm callers said 0:03:02.320 --> 0:03:04.359 we want to cut back on the investment bank. We're 0:03:04.400 --> 0:03:06.480 not as interested investment bank. Would you expect to sort 0:03:06.720 --> 0:03:09.840 the sort of profile the bank to shift. Yeah, I do, 0:03:10.000 --> 0:03:14.440 but I think that's universal. I think the big banks 0:03:14.440 --> 0:03:17.399 who've had big trading positions and taken a lot of risk, 0:03:17.480 --> 0:03:20.040 I think they've all dilled that back, and clearly the 0:03:20.080 --> 0:03:22.000 Swiss is going to do that now. When I was there, 0:03:22.919 --> 0:03:25.440 it was first Boston was their investment bank, and the 0:03:25.600 --> 0:03:29.440 amount of risk that we took was really out of 0:03:29.440 --> 0:03:32.120 proportion what we should have been doing. So I think 0:03:32.160 --> 0:03:34.880 all the banks are focused a lot more on risk. 0:03:35.040 --> 0:03:38.440 I think their regulators are better at defining and seeing 0:03:38.480 --> 0:03:43.000 the risk. But I think banks have to maintain confidence 0:03:43.040 --> 0:03:45.880 in their institution, and when you have big swings, when 0:03:45.880 --> 0:03:48.520 you take a huge loss on some risk position, it 0:03:48.600 --> 0:03:51.640 hurts their credibility and it hurts the trust that people 0:03:51.680 --> 0:03:53.960 have in them. So I think most of these banks 0:03:53.960 --> 0:03:55.880 are going to be much more conservative and the risk 0:03:55.960 --> 0:03:57.920 they take, which brings us back to the United States 0:03:57.960 --> 0:03:59.720 to some extent, we have our own problems with banks 0:03:59.760 --> 0:04:01.960 right in the United States, starting with Silicon Valley Bank 0:04:02.080 --> 0:04:05.680 going beyond that. At the same time, is this similar 0:04:05.680 --> 0:04:07.600 to what you saw in twenty eight, two and nine, 0:04:07.640 --> 0:04:10.520 again you were running Morgan Stanley. The banks, including Morgan 0:04:10.520 --> 0:04:12.240 Stanley had taken a lot of risk on there's a 0:04:12.240 --> 0:04:15.040 lot of leverage in the respect retrospect didn't work out 0:04:15.080 --> 0:04:18.159 so well. Do we have a similar issue now, you know, David, 0:04:18.200 --> 0:04:20.800 I don't think so. I think the banking issue at 0:04:20.839 --> 0:04:24.360 Silicon Bank is pretty straightforward. What they were doing, who 0:04:24.360 --> 0:04:27.120 they were underwriting, who they were lending money to. I 0:04:27.160 --> 0:04:29.560 think you go back to the crisis here in New 0:04:29.640 --> 0:04:33.960 York and the markets we're really volatile. We were just 0:04:34.000 --> 0:04:37.680 taking market risk. We were not taking tremendous credit risk, 0:04:37.760 --> 0:04:42.039 either with companies or with individuals. So when you look 0:04:42.040 --> 0:04:44.240 at Wall Street back then, a lot of our risker 0:04:44.320 --> 0:04:47.640 and government securities and just loading up the balance sheet 0:04:47.680 --> 0:04:50.720 saying there's making a bet on interest rates, not on credit. 0:04:51.200 --> 0:04:54.040 So I think the difference today is the credit risk, 0:04:54.480 --> 0:04:57.280 not so much the interest rate risk. But we have 0:04:57.360 --> 0:04:59.520 interest rate risk now all the time. They have interest 0:04:59.560 --> 0:05:01.240 rate risk well, and the feed is meeting just this 0:05:01.279 --> 0:05:03.480 week and it's we don't know if it's going to 0:05:03.560 --> 0:05:06.400 raise rates again or not. There are a lot of institutions, 0:05:06.520 --> 0:05:09.400 banks as well as the corporations that maybe have based 0:05:09.440 --> 0:05:12.520 their whole theory on low interest rates forever, which we're 0:05:12.520 --> 0:05:14.360 not going to have. So how much risk is there 0:05:14.440 --> 0:05:16.719 in terms of interest rate risk in the system, do 0:05:16.720 --> 0:05:19.200 you think? I don't think as much as we've seen 0:05:19.240 --> 0:05:22.640 in the past. I mean I don't. I just don't 0:05:22.640 --> 0:05:25.240 see banks, and again I've been retired for a while. 0:05:25.720 --> 0:05:27.880 I don't see them taking all that kind of risk 0:05:28.320 --> 0:05:31.320 to try to get earnings up. They're all always that 0:05:31.440 --> 0:05:33.600 it's going to be a risk in the marketplace. There's 0:05:33.640 --> 0:05:36.480 always interest rate risk. But I think all the banks 0:05:36.480 --> 0:05:38.760 are much more discipline and the kind of risk they want. 0:05:39.000 --> 0:05:42.159 I also think the Federal Reserve and regulators are much 0:05:42.200 --> 0:05:45.080 more astute at looking at these balance sheets and the 0:05:45.160 --> 0:05:49.320 risk they're taking. The risk should be in helping build businesses, 0:05:49.800 --> 0:05:52.120 not speculating in the market. If you want to speculate 0:05:52.120 --> 0:05:56.040 in the market, divine or define a certain amount of 0:05:56.080 --> 0:05:58.000 capital you want to put on the trading desk and 0:05:58.120 --> 0:06:00.640 take a risk that way. But in the risk of 0:06:00.839 --> 0:06:04.520 making these big loans and taking a lot of exposure 0:06:04.600 --> 0:06:07.760 if the markets change in these companies, I think that 0:06:07.839 --> 0:06:10.800 has really been dialed back. Is the big banking business 0:06:10.839 --> 0:06:12.520 in it says as interesting as it was when you 0:06:12.560 --> 0:06:14.440 were in it. In this sense, a lot of the 0:06:14.480 --> 0:06:16.480 business is going into credit. The prior to credit. Now 0:06:16.680 --> 0:06:19.120 it's gone out from the regulatory part right, and the 0:06:19.160 --> 0:06:21.080 big money center banks, as you say, have gotten a 0:06:21.080 --> 0:06:26.120 lot more conservative. You built a career actually and taking risk. Yeah, 0:06:26.360 --> 0:06:30.000 some would argue we took too much risk, and thank 0:06:30.040 --> 0:06:33.599 God for the Chinese and the Japanese who helped us 0:06:33.640 --> 0:06:37.320 get through all that. Yeah. I think given the crisis 0:06:37.360 --> 0:06:39.640 that we all went through years ago, I think bank 0:06:40.200 --> 0:06:43.960 boards are much more astute, much more involved, and I 0:06:44.000 --> 0:06:47.920 think the CEOs and treasures of the institutions are really 0:06:47.960 --> 0:06:50.440 concerned about how much risk are we taking and how 0:06:50.480 --> 0:06:54.479 much can we afford? John famous story in your book 0:06:54.560 --> 0:06:56.920 Up Close and All End actually is when you had 0:06:56.920 --> 0:07:00.039 Tim Geitner and Hank Paulson and Ben Burnanky on the 0:07:00.040 --> 0:07:02.600 phone saying you got to sell to Jamie Diamond as 0:07:02.640 --> 0:07:05.760 I recall at a discount price, and you stood up 0:07:05.760 --> 0:07:09.200 to them. There are some bank leaders right now having 0:07:09.240 --> 0:07:14.000 similar conversations in Switzerland, in Washington with bank regulators. How 0:07:14.000 --> 0:07:16.560 did you have the courage it was required to stand 0:07:16.640 --> 0:07:21.480 up to Hank Poulson and Tim Geitner. Well, I guess 0:07:21.480 --> 0:07:25.720 the courage came from if we had listened to them. 0:07:26.240 --> 0:07:30.000 Morgan Stanley wouldn't exist now, and my gut feel was 0:07:30.600 --> 0:07:33.080 that we were going to get through this. I believe 0:07:33.280 --> 0:07:35.400 that Japanese We're going to put money in. We had 0:07:35.400 --> 0:07:38.720 a great relationship with the Japanese and that came from 0:07:38.880 --> 0:07:42.360 years of doing business in Japan and we used to 0:07:42.360 --> 0:07:46.240 bring in When I joined Morgan Stanley, there were always 0:07:46.360 --> 0:07:51.000 two to five Japanese employees of the banks from Japan 0:07:51.440 --> 0:07:56.120 as trainees, and the Japanese had remembered the culture and 0:07:56.200 --> 0:07:58.880 they really adopted the culture. And when we were in trouble, 0:07:58.920 --> 0:08:02.240 the reason the Japanese stepped up they knew our culture. 0:08:02.840 --> 0:08:06.640 And God bless the founding partners of Morgan Stanley of 0:08:06.680 --> 0:08:10.400 having that kind of relationship and the foresight to bring 0:08:10.440 --> 0:08:13.280 people from all over the world, but especially from China 0:08:13.360 --> 0:08:16.640 and from Japan to see the culture. How we manager is, 0:08:16.680 --> 0:08:19.840 how we built a business, how we built relationships, and 0:08:19.920 --> 0:08:24.200 the Japanese clearly had a lot of respect for that 0:08:24.280 --> 0:08:26.720 and admiration for it. So that's why they stood up 0:08:26.720 --> 0:08:29.600 and said, we'll put the money in. How would the 0:08:29.640 --> 0:08:32.800 world of look, the financial world look different if, in fact, 0:08:33.000 --> 0:08:35.400 JP Morgan had bought Morgan Stanley and you didn't have 0:08:35.440 --> 0:08:37.680 a Morganstown anymore. What would it have meant for the 0:08:37.720 --> 0:08:40.760 overall economy and the financial world. Well, look, I think 0:08:40.800 --> 0:08:45.640 to have broad based investment banking community gives you better ideas, 0:08:45.679 --> 0:08:49.240 creative ideas, and also it dissipates risk over a much 0:08:49.320 --> 0:08:55.880 larger platform. So I think concentration too much concentrations a negative. 0:08:56.400 --> 0:08:59.120 And if we'd have lost Morgan Stanley and I remember 0:09:00.679 --> 0:09:03.439 Paulson colony and saying Saint John, you got to hang 0:09:03.480 --> 0:09:05.840 on because if you go down, we're right behind you, 0:09:06.400 --> 0:09:09.160 and it would have eroded. I think the investment banking business, 0:09:09.160 --> 0:09:13.839 which I believe really diversifies risk, also is very creative, 0:09:14.160 --> 0:09:17.400 a global business, and I think helps liquidity in the market. 0:09:17.440 --> 0:09:20.880 Plus also hiring a lot of people who do really 0:09:20.920 --> 0:09:23.800 well and helping companies. So it would have been a 0:09:23.840 --> 0:09:26.959 disaster if we had gone down, and I think it 0:09:26.960 --> 0:09:29.480 would have been a domino effect. And thank God for 0:09:29.520 --> 0:09:32.800 Hank Paulson. And when you talk about heroes, Hank Paulson's 0:09:32.840 --> 0:09:35.400 a hero. He really stood up. When you talk about 0:09:35.480 --> 0:09:38.720 hiring people, You've made it clear in your book that 0:09:38.800 --> 0:09:41.160 people are really what it's all about. Getting the right 0:09:41.200 --> 0:09:43.360 people getting the right places. You have a couple that 0:09:43.400 --> 0:09:45.640 you had working for you, we're gone on. We have, 0:09:45.720 --> 0:09:48.720 of course James Gorman running Morgan Stanley, who's done a 0:09:48.720 --> 0:09:51.079 pretty good job by all the great job, and Calm 0:09:51.080 --> 0:09:54.400 Color now who's back in the spotlight running Ubs, which 0:09:54.440 --> 0:09:56.800 is going to take over credit Sueez. What do you 0:09:56.840 --> 0:09:59.640 think about Calm Color as a leader? I think as 0:09:59.640 --> 0:10:03.520 a first class leader. Clearly he's very smart, and I 0:10:03.559 --> 0:10:06.440 think working together through the crisis, it showed that he 0:10:06.480 --> 0:10:09.280 was able to keep his financial team on board. In 0:10:09.320 --> 0:10:13.160 other words, people were close to panicking and he calmed 0:10:13.200 --> 0:10:15.000 them down. And I gave him a little bit of 0:10:15.080 --> 0:10:17.720 help on that, but he did it. Says a natural leader, 0:10:18.000 --> 0:10:19.840 and I think he's a natural for what he's going 0:10:19.920 --> 0:10:23.320 to do in Switzerland. Finally, what does it take to 0:10:23.400 --> 0:10:25.520 become in the middle of a crisis? You didn't with 0:10:25.600 --> 0:10:27.360 respect to the pressure, but Morgan stun You just talk 0:10:27.400 --> 0:10:29.360 about Colm Color hurt in the crisis. You were there 0:10:29.760 --> 0:10:33.280 and in some really difficult times. What separates the people 0:10:33.280 --> 0:10:37.080 who can handle that from the ones who can't? I 0:10:37.160 --> 0:10:42.760 want to say stupidity. I knew if I cracked, they 0:10:42.800 --> 0:10:45.840 all cracked. So I had to put on a face 0:10:45.960 --> 0:10:51.000 that you know, I'll never forget Tom, and I'd say 0:10:51.120 --> 0:10:53.240 to me, you know, you act like nothing's going on. Well, 0:10:53.240 --> 0:10:56.400 what they didn't know I was shut my office door 0:10:58.120 --> 0:11:01.280 and just try to pull myself together. Couldn't. I couldn't 0:11:01.280 --> 0:11:04.800 show the stress of fear that we were under. And 0:11:05.440 --> 0:11:08.679 I'll never forget Colin, Christie my wife and saying, Christie, 0:11:08.880 --> 0:11:11.319 I don't know if I can get this done. And 0:11:11.440 --> 0:11:14.840 you turn to people you can trust and people who 0:11:14.920 --> 0:11:18.440 know you well and people who are not going to leak. Oh, guy, 0:11:18.520 --> 0:11:22.319 John Mack is really frightened about the crisis. And for me, 0:11:22.880 --> 0:11:26.120 the best person was Christie. And then I had other 0:11:26.160 --> 0:11:29.240 people like Tom Knigs, who's a close friend, various stute, 0:11:29.600 --> 0:11:31.160 and he was one of the few people who would 0:11:31.240 --> 0:11:34.440 constantly come to my office and say, stupid, you can't 0:11:34.440 --> 0:11:37.320 do that, and you need someone to put a mirror 0:11:37.360 --> 0:11:40.000 in front of you and challenging. Tom did that. Colin 0:11:40.120 --> 0:11:45.240 did that. And I had great talent and James Gorman 0:11:45.360 --> 0:11:50.800 was unbelievable and so cool given what we were going through. 0:11:51.440 --> 0:11:55.200 So the leadership team remained very calm, and I you know, 0:11:55.200 --> 0:11:59.439 I give Tom Knigs credit I give Colum credit, Gorman credit, 0:12:00.080 --> 0:12:03.319 and I just listened to the people out there in 0:12:03.360 --> 0:12:05.880 the business. If they did say, John, you need to 0:12:05.880 --> 0:12:08.920 get on a plane and fly to London, I was gone. 0:12:09.440 --> 0:12:11.040 I would do whatever they asked me to do. They 0:12:11.080 --> 0:12:14.800 were more in contact with people and issues than I was, 0:12:15.280 --> 0:12:18.319 and also made it a point to be seen. I'd 0:12:18.320 --> 0:12:21.040 get out and walk the trading floor, walk investment banking floor, 0:12:21.559 --> 0:12:23.440 and people looked at me. I'd be joking on the 0:12:23.480 --> 0:12:26.200 trading floor. They'd say it cut. Max seems to be 0:12:26.240 --> 0:12:29.480 really relaxed about this, and it kind of let some 0:12:29.559 --> 0:12:31.600 of their air out of tension, just kind of went 0:12:31.600 --> 0:12:33.200 out of their bodies and they said, no, we're going 0:12:33.280 --> 0:12:37.120 to be all right. And you know, I really believed 0:12:37.120 --> 0:12:39.240 we weren't going to be all right, and the worst 0:12:39.280 --> 0:12:41.600 thing we could have done was panicked, and we didn't. 0:12:41.960 --> 0:12:44.240 And I had a team in place, is starting with 0:12:44.280 --> 0:12:47.600 people like Tom Nds and James Gorman and Colum callaher 0:12:48.040 --> 0:12:50.360 who really got us through that. So I was lucky 0:12:50.840 --> 0:12:53.200 in many ways that it wasn't me. It was the 0:12:53.240 --> 0:12:54.600 team that's who got us through it.