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Speaker 1: Welcome to our Bloomberg television and radio audiences. I'm standing

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Speaker 1: by at Morgan Stanley's headquarter with Morgan Stanley CEO and

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Speaker 1: Chairman James Gorman. It's been a blockbuster earnings reaction for you,

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Speaker 1: but also a pivotal moment in Morgan Stanley's history, with

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Speaker 1: you announcing that you would step down into next year sometime.

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Speaker 1: How did you know that this is the right time

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Speaker 1: for you.

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Speaker 2: Well, firstly, Shaneli, thanks for coming over. Fourteen years. Is

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Speaker 2: it's a long time to do anything, and to run

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Speaker 2: a global bank and deal with all the changes that

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Speaker 2: are going on in the world. You know, it's important

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Speaker 2: for organizations to refresh, So I think it's certainly a

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Speaker 2: very long time to be a bank CEO, and everybody's

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Speaker 2: going to find their own agenda. My focus is on

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Speaker 2: ensuring that this place does well over the next ten

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Speaker 2: to twenty years. To do that, you need to give

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Speaker 2: the next generation a chance, and they will do things

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Speaker 2: differently and they will grow the place in a way

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Speaker 2: that I might might not have imagined. So it's exciting,

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Speaker 2: it feels right.

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Speaker 1: What criteria is the board using to choose a new CEO?

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Speaker 1: I mean it's a big open question on whom I

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Speaker 1: take over next. You've said there are three candidates. How

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Speaker 1: do we think about who the next person is?

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Speaker 2: Well, I think you've got you look at a whole

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Speaker 2: range of criteria. The first and obvious one is are

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Speaker 2: they good at running businesses? And you know, when I

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Speaker 2: took over the job, I was actually running the smallest

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Speaker 2: and worst performing part of the company, but we were

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Speaker 2: turning it around. So the board wants to know they're

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Speaker 2: good business leaders. But the other qualities, which which every institution,

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Speaker 2: be it educational, government or not for profit or public

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Speaker 2: companies look for in leaders. It's character, it's endurance, resilience,

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Speaker 2: strategic sense, communication skills, all the obvious stuff that you'd expect.

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Speaker 2: And fortunately we've got three fabulous candidates. They're all internal

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Speaker 2: and they all have great business skills. And now the

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Speaker 2: board has, you know, the opportunity to figure out who's

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Speaker 2: the best to lead Morgan Stanley for the years ahead

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Speaker 2: the Morgan Center that we're going to become. So I

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Speaker 2: think they can all do it.

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Speaker 1: If you think about just how much Morgan Stanley has changed,

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Speaker 1: and the investments you've made in wealth management, investment management,

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Speaker 1: and frankly the idea here that the profitability of the

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Speaker 1: wealth manager is just through the roof, and frankly a

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Speaker 1: lot more than you're seeing even in institutional securities. Doesn't

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Speaker 1: make more sense for the future leader to come from

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Speaker 1: some of those growth areas well.

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Speaker 2: I'm not going to get into speculating, which is, you

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Speaker 2: know what I'm sure you'd like me to do. But

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Speaker 2: the board doesn't look so much at how a specific

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Speaker 2: business is performing. They look at again the enduring qualities

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Speaker 2: of the leader and whether they have the kinds of

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Speaker 2: skills you need to lead a complex global institution. And

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Speaker 2: as I said, all three of the people we have

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Speaker 2: internally are terrifically well equipped. They're great people, they have

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Speaker 2: great respect for each other, they have terrific values. So

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Speaker 2: you know we've got an embarrassment of riches as well.

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Speaker 1: I'll say, how do you focus on culture during this transition?

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Speaker 1: How do you ensure that whoever doesn't get the job

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Speaker 1: stays on board? Is that something you worry about?

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Speaker 2: No? Really, no, I think you know we've worked together

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Speaker 2: for I think with this team plus the other senior

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Speaker 2: leadership people like Sharona Shire, our CFO is on the call,

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Speaker 2: Eric Grossman, our Chief Legal Officer, Carol Vincent Green, who

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Speaker 2: runs internal laudit. We've had a very significant leadership team

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Speaker 2: working closer together for a long period of time. What

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Speaker 2: matters about cultures. You share the same values, and we

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Speaker 2: share the same values. There's no there won't be the

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Speaker 2: drama that people perhaps look for in succession around this

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Speaker 2: particular one. I'm convinced. I think it will be relatively seamless,

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Speaker 2: and I think it will lead to a great outcome.

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Speaker 1: Now we have to talk about the numbers here, because

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Speaker 1: Weld Management sure two hundred billion dollars in net new

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Speaker 1: money for the first half of the year, and it's

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Speaker 1: quite breathtaking. It's certainly nothing to cry about here. How

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Speaker 1: much of this is a function of the dislocations in

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Speaker 1: the market the business that you've taken on from First

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Speaker 1: Republic or Silicon Valley.

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Speaker 2: Bank, I would think, I don't know exactly, but my

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Speaker 2: guess is less than ten percent related to that. So

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Speaker 2: ninety percent related to just the change in the business

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Speaker 2: model that we've put in place over the last you know,

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Speaker 2: fifteen years, and that business, now led by Andy Sepastein,

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Speaker 2: have figured out a variety of ways to grow client activity,

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Speaker 2: whether it's through direct, through the e trade platform and

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Speaker 2: the digital bank, whether it's through the workplace, which we

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Speaker 2: did first with Solium the acquisition, then the e Trade workplace,

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Speaker 2: the advisor led channel. We've had very low turnover advisors,

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Speaker 2: and we still seem to be the place of choice

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Speaker 2: for many of our competitors financial advisors. So it's the

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Speaker 2: beauty of it is it's no one single thing. This

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Speaker 2: quarter it was a bit more advisor driven than it

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Speaker 2: was last quarter, but all of them are contributing. That's

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Speaker 2: why I think it's going to endure it.

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Speaker 1: When you look at the start price on my way

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Speaker 1: over here, it was at more than seven percent. You're

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Speaker 1: on track to have the best performance in trading right

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Speaker 1: after and early. He's releasing your your tenures certainly of

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Speaker 1: not history here. So what do you think investors are

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Speaker 1: latching onto when they look at today's numbers?

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Speaker 2: I think I should retire right today. Is this the

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Speaker 2: moment where you drop the mic or something?

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Speaker 1: Then who's in a city?

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Speaker 2: Yeah, I know that's not going to happen. Nice try that, No, Listen.

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Speaker 2: We we had some big movements in the stock when

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Speaker 2: it was very low back in twelve and fourteen, and sixteen,

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Speaker 2: twenty twelve, fourteen sixteen. No, but today's big, but it's

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Speaker 2: it's just reflective of the fundamentals are really strong. Our

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Speaker 2: capital ratios. I mean, we'll see when all the banks report.

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Speaker 2: We're close to the end of the major banks, but

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Speaker 2: I'm pretty sure we've got the highest capital levels of

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Speaker 2: any bank, any major bank in the US. The net

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Speaker 2: new money numbers your reference are obviously evidence of growth.

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Speaker 2: And our dividend is four percent or close to it.

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Speaker 2: So combination of really high conservative capital levels, obvious organic

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Speaker 2: growth within a couple of core businesses, and very high

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Speaker 2: dividend yield for what we do. I think the investors

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Speaker 2: sensibly look past what's been going on in the market recently.

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Speaker 2: You know, IPO activities obviously down, m and A activities down,

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Speaker 2: some of the fixed income trading was a little more muted.

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Speaker 2: None of that matters, right, strategically, that doesn't matter. That's

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Speaker 2: a point in time. Market sentiment that will change. Deals

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Speaker 2: will get done, companies will go public, people will trade.

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Speaker 2: So I think the market sensibly looked at the big

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Speaker 2: picture items and said, yeah, the rest of the stuff

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Speaker 2: will just come, and that's why we're trading. The way

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Speaker 2: we're trading. It was a great clean quarter.

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Speaker 1: When you look at investment banking, trading advisory, when do

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Speaker 1: they come back and how robust will that activity be?

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Speaker 2: Well, I think I don't know when exactly. I do

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Speaker 2: believe it's bottomed. And we were just talking before we

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Speaker 2: got on air. You know, I've been to in the

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Speaker 2: last couple of months Australia, Japan, Saudi, France, England, Ampstin,

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Speaker 2: I mean, and all over the US, and every CEO

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Speaker 2: I'm talking to has tilted to a more forward looking posture.

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Speaker 2: So I think deals will start getting done. Whether they

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Speaker 2: happen in the back half of this year, I'm not

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Speaker 2: so sure. It might be next year that it comes.

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Speaker 2: It will definitely be. It will be during next year

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Speaker 2: when we see it, if not this year.

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Speaker 1: James, what does all of this mean for headcount? You've

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Speaker 1: booked more than three hundred million dollar cost tied to

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Speaker 1: severance packages, but it seems like headcount is starting to stabilize.

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Speaker 1: Do you think that a rebound in some of this

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Speaker 1: activity means that you could bring more people on or

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Speaker 1: do you still see more cuts in snarreas?

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Speaker 2: Not really, I mean, we laid off about eighteen hundred

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Speaker 2: people last December, and we knew that was an optimistic view,

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Speaker 2: and I said to the team, if by April things

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Speaker 2: haven't turned, we'll have to, unfortunately do it again, and

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Speaker 2: we ended up laying off another three and a half

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Speaker 2: thousand people. Now, against that backtrop we've had attrition I

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Speaker 2: think is running almost fifty percent what historical rates are.

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Speaker 2: We've got eighty three thousand employees. We bought two huge companies,

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Speaker 2: Eat Trade and Eat Advance, and we guaranteed everybody their

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Speaker 2: job during COVID, So headcount was, if you will, artificially high.

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Speaker 2: I regarded this as bringing us back to what the

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Speaker 2: normal run rate should be. I don't think we're going

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Speaker 2: to add to that. I mean, one of the beauties

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Speaker 2: of this business that's very scale driven. If you do

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Speaker 2: a few more trades, you don't need more people to

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Speaker 2: do it for the same client. So no, I think

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Speaker 2: we're about right with headcount right now. But obviously, you

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Speaker 2: know we've got fiducial responsibility shareholders deliver returns, and we

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Speaker 2: watched that carefully.

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Speaker 1: You know, your views sound fairly rosy. I mean it

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Speaker 1: sounds like you are pretty sanguine about the direction of

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Speaker 1: travel here. Across different business lines. Earlier this week's Secretary

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Speaker 1: Treasury Yellen had told us that she believes that there

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Speaker 1: might not be a recession.

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Speaker 2: Do you agree with that view? Well, I've said publicly

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Speaker 2: for over a year I thought the probability of recession

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Speaker 2: was low, and if we have one, the magnitude is

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Speaker 2: likely to be relatively modest. So I've been sort of

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Speaker 2: between probability loaves. So likely we don't have a recession,

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Speaker 2: and if we do, it's not going to matter that much.

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Speaker 2: And I think things are playing out that way. I mean,

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Speaker 2: Chairman Powell said it. You know, it is possible to

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Speaker 2: have self landings, right, It's been done. I think six

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Speaker 2: of the last eleven rate increase periods. I believe I'm

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Speaker 2: right in saying that they've been self landing. So it's

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Speaker 2: not a given. You have a recession with unemployment where

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Speaker 2: it is, inflation at coming down under four percent, unemployments

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Speaker 2: still under four percent, decent economic growth, stable markets, the

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Speaker 2: banking system balance sheets are strong, and consumer balance sheets

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Speaker 2: are okay. That's a pretty good backdrop. Now, some industry

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Speaker 2: sectors obviously hurting more than others, but you're seeing it

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Speaker 2: in the earnings this quarter. The earnings are not really bad.

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Speaker 2: They're not great, but they're not disappointing.

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Speaker 1: So then what keeps you up at night to the

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Speaker 1: extent that anyone thing can derail kind of this progress

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Speaker 1: in the economy, What would it be?

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Speaker 2: I mean, the real macro isssue, if you step back

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Speaker 2: from it, is the China You relationship. The GDP of

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Speaker 2: those two countries I think is forty percent of the

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Speaker 2: global GDP. They're very dependent. We're very dependent on China.

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Speaker 2: China is more dependent on the rest of the world,

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Speaker 2: frankly for trade. So that's sort of the tipping point.

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Speaker 2: I mean, there's an existential one, which is the US

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Speaker 2: to faulding on its debt. That didn't happen. It's insane

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Speaker 2: that we should even be having these discussions, but thankfully

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Speaker 2: they got through the charade again. But what really matters

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Speaker 2: is US China geopolitical relationships for global trade and economic expansion.

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Speaker 2: And within that, you know, you've seen Secretary Blincoln and

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Speaker 2: now Secretary Yellen in the last month, both going there.

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Speaker 2: We're getting to a more constructive tone, so you know,

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Speaker 2: but Chanelli, honestly, after all the years of doing this,

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Speaker 2: I don't worry a lot at night. I mean, stuff

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Speaker 2: happens and you deal with it. You have a strategy

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Speaker 2: which is designed to carry the company forward for a

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Speaker 2: decade or more, and you accept the inevitable disappointment sloan

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Speaker 2: the way, or the things that go wrong, and that's

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Speaker 2: just part of being a leadership job.

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Speaker 1: Speaking of the next ten years, there is something around

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Speaker 1: the corner that has it potential to impact some of

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Speaker 1: the biggest businesses you have, and that is that buzzle

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Speaker 1: three end game. Sure, new regulations in the United States

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Speaker 1: and across the globe that are targeting now fee based businesses,

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Speaker 1: which has become a big part of your business, as

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Speaker 1: well as trading businesses. How do you expect those rules

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Speaker 1: to eventually impact the returns on those businesses?

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Speaker 2: Yeah? Well, firstly, and I'll try not to get too weedy,

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Speaker 2: but the rule hasn't been proposed yet. We've had buzzer one,

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Speaker 2: buzzle two, buzzle three is I joked finally we're at

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Speaker 2: the end because they're now calling a buzzle three endgame,

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Speaker 2: so I guess we're not going to get four and five.

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Speaker 2: Europe has not even caught up and complied with its

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Speaker 2: own buzz or rules. The US has had a system

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Speaker 2: parallel to BUZZLE called SEECA, and all of the banks

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Speaker 2: have come through CCA this cycle very well. So based

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Speaker 2: upon Vice chair bars speech, clearly they're going ahead with

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Speaker 2: a holistic so they look at SEACARM BUZZLE review that

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Speaker 2: will be proposed in a couple of weeks. I expect

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Speaker 2: it to be a pretty challenging for the banking system

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Speaker 2: at first blush, But if you read the speech by

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Speaker 2: the Vice Chair and various other commentary, it is clear

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Speaker 2: that they want input and they're going to need input.

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Speaker 2: There are things that were proposed under the European system

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Speaker 2: that I just don't think are appropriate for the US system, like,

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Speaker 2: as you said, changing the way they measure operating risk

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Speaker 2: RWAs risk weighted assets based on the feed businesses you have.

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Speaker 2: That's completely intellectually counterintuitive to what you want in feed

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Speaker 2: based businesses, which is stability. So I don't see why

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Speaker 2: the US financial system should be dictated by the European regulators,

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Speaker 2: and I just don't see that's where it's going to

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Speaker 2: end up. I think there'll be there'll be a lot

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Speaker 2: of discussion, and my guess is none of this gets

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Speaker 2: implemented before the end of twenty twenty six, so several

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Speaker 2: years to adjust and we carry currently a two hundred

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Speaker 2: and sixty bases point capital buffer. Our CT one ratio

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Speaker 2: this quarter was fifteen point five percent our requirement seek

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Speaker 2: how it's twelve point nine percent. So we are very

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Speaker 2: conservatively positioned in anticipation whatever changes may happen. But again, Shanali,

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Speaker 2: the key is they're going to happen over years. This

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Speaker 2: isn't going to be tomorrow.

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Speaker 1: But the changes that would happen would still be under

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Speaker 1: a new regime at Morgan Stanley, would be under a

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Speaker 1: new executive. Do you think that, I hope. So the

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Speaker 1: bank will have to make changes around its business lines

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Speaker 1: if these rules were to be as stringent as they No.

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Speaker 2: I don't think so. No, we won't change our strategy.

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Speaker 2: I mean we'd make adjustments on iwas and parts of

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Speaker 2: the business. But no, it's manageable. It's just I'm separating

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Speaker 2: is it manageable from is it the right thing to do?

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Speaker 2: And I don't think the US economy is what matters here,

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Speaker 2: and for the US economy to thrive, I we need

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Speaker 2: a strong banking system led by the largest banks in

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Speaker 2: the country, and we should determine what is the right

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Speaker 2: capital structure of our banks, not have it determined by

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Speaker 2: some other body outside of this country. In the national interest,

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Speaker 2: we should do it.

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Speaker 1: That old saying that if you squeeze Wall Street like

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Speaker 1: a sponge, the activity will move elsewhere. And a lot

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Speaker 1: of your rivals have said that they're very concerned about

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Speaker 1: the activity moving outside of the banking system into the

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Speaker 1: non banks. Do you share that concern And what are

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Speaker 1: the risks that are emerging that are maybe going unnoticed.

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Speaker 2: Well, there's always you know, if you pressure the regulatory

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Speaker 2: part of the industry, it will move to the non

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Speaker 2: regulated part because they don't have the same capital charges

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Speaker 2: that we have. So yes, that is a real risk.

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Speaker 2: And in fact, and again not to get too weedy,

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Speaker 2: but it's something called the supplemental lever treasure, which simply

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Speaker 2: takes the amount of capital you have on the size

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Speaker 2: of your balance sheet. Basically hurts you for carrying a

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Speaker 2: large balance sheet, even if it's all treasuries and you

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Speaker 2: participate in the treasuries market to provide liquidity to the

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Speaker 2: broader financial system. So yes, there are consequences from decisions,

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Speaker 2: and that's why the regulators sensibly have asked for and

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Speaker 2: will ask for a very long comment period, and they

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Speaker 2: will get vigorous comment from me and from others. I'm

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Speaker 2: quite firm on this. We don't need a complete redo

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Speaker 2: of the capital system here, and we'll make the case

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Speaker 2: as to why that's so. James, what about you?

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Speaker 1: What does life after Morgan Stanley look for you? Do

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Speaker 1: you think you'll stay in financial services or consider a

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Speaker 1: career somewhere else, perhaps politics.

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Speaker 2: No, I'm very happy with my life. You know. My

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Speaker 2: focus is on handing it over to my successor and

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Speaker 2: making sure they have what I described as the cleanest

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Speaker 2: plate possible. So as many of that, we have a

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Speaker 2: few remaining issues that I want to work through and

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Speaker 2: get those cleaned up. And probably based on my experience,

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Speaker 2: I can handle some of this stuff more reason than

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Speaker 2: somebody's starting day one. And after that, I don't know.

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Speaker 2: I'm Australian. I'll spend a little more time with my

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Speaker 2: family there. I'll obviously keep working in some capacity, and

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Speaker 2: I'll teach a little bit. And you know, who knows

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Speaker 2: the beauty of life is there are a lot of

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Speaker 2: things to do, so I'm embracing that, enthusiastic about it.

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Speaker 1: James, thank you for your time. That is James Gorman,

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Speaker 1: the CEO and Chairman of Morgan Stanley