Morgan Stanley CEO James Gorman spoke to Bloomberg TV's Erik Schatzker about the company's first-quarter profit reported today, its credit rating and financial regulation. Gorman said that “there’s clearly been an uptick in performance” for the firm but “we still have a lot of upside.”
Gorman also denied that Morgan Stanley could be involved in proprietary trading, saying that “The regulators are very good…This is not a question of hiding. This is a question of defining what is a proprietary position and what is not…"
On whether trading revenues at Morgan Stanley are sustainable:
"In absolute dollars, it's affected by the market environment. In relative position, I think it's pretty clear that we're gaining share. But it's been clear honestly for a while, equities last year gained 350 basis points market share. Great leadership, pushing hard. Fixed income -- we made a lot of investments, in our electronic platform, in our headcount, particularly in rates and foreign exchange. Credit business has always been strong. All of those are starting to kick in now. Again, I can't predict the macro environment but micro, how Morgan Stanley is doing within the category, there's clearly been an uptick in performance."
On investors who question the staying power of Morgan Stanley's fixed income franchise:
"We get questioned every day by somebody about some aspect of what we do and my attitude is, we're running this business, we have a clear strategy and we're not going to be swayed off it just because somebody doesn't like it at any point in time."
On Morgan Stanley's profit potential:
"We still have a lot of upside. Look at the equity new-issue calendar, it was very slow. Investment bank advisory, very slow. Wealth management with zero interest rates, very slow."
On the possibility of a Moody's downgrade of Morgan Stanley:
"To put it in a lot of context, Moody's is looking at financial institutions all over the world. We're not the only ones that are being subjected to a potential downgrade - every institution that they've identified is being subjected to it. They started with Portugal last week.”
"Secondly, we've identified about 8% of our business could potentially be affected by the most extreme outcome that Moody's has. We've been living with this rating actions for a couple of years now. We went through it with S&P and Fitch. I don't think there's any possibility we're not be doing business with BlackRock. It's only certain individual contracts. We've created a number of workaround situations where we can deal with this. Is it a catastrophic outcome? No, it is not."
On whether Morgan Stanley employees have left:
"Very few departures…Generally, our employees are happy and loyal. If you're going to pay yourself, you better pay the person who gave you the money to do the business."
On the Volcker rule:
"The current language is a book. It's 300 pages, and there's several hundred new rules being written all the time. The Federal Reserve who is responsible for implementing it said they don't think they'll be ready by July. We don't know. It's still a work in process. It's become, on anybody's estimation, way too complicated to be successfully implemented. It needs to be simplified."
On whether banks are hiding proprietary trading under risk management:
"Anybody that is a regulated institution by the Federal Reserve, and the regulators around the world, you cannot hide stuff."
"The regulators are very good. Give the regulators more credit than they're good. We're very involved with our regulators, they know exactly what we're doing…This is not a question of hiding. This is a question of defining what is a proprietary position and what is not…"
On the post-financial crisis regulation:
"I’m accepting a reality that coming out of the financial crisis, the banking industry was under-capitalized. The banking industry had too little liquidity. Everybody would accept that. The Basil III regulations are tough, they're requiring institutions like ours to bring our cap levels to somewhere between 8% and 10% and carry a lot of extra liquidity. That's a reality. Now I'm working with that reality, I don't think we're going to change that reality. We need to work with it and address business challenges and make changes if necessary."
On the outlook for the rest of 2012:
"Looking at the United States, I believe it's a lot stronger than most pundits and most economists do…The banks are in a lot better shape, as these earnings have demonstrated -- not just ours, but the other big banks. Europe is clearly going to be in a period of fits and starts over the next several years. As each of those economies re-adjust the leverage they built up pre- financial crisis, and we continue to have strong emerging markets around the world."
On what's next for Europe:
"What the U.S. did with the banking system was pretty instructive. They forced the banks to deleverage…They forced deleveraging, but also forced capital raising through TARP. By giving the capital at punitive rates, you are highly incented to pay back quickly. That didn't happen in Europe. That's the process that some banks have been doing on their own, but some are being forced to do."
On whether the long-term repurchase agreements in Europe are merely Band-Aids:
"Band-Aids is a bit strong, but they're certainly steps in a process. They're not answers. One thing we learned it when then Fed president Geithner and Treasury Secretary Paulson and Ben Bernanke got together was that they're very creative in terms of the things they were prepared to put out there. And during a crisis, there isn't a rulebook. You have to rely on your instincts, and to try things, and to keep trying and that's what going on in Europe right now."
On Mario Draghi:
"[Mario Draghi's] doing a good job. We've got a pro in that seat and it's making a difference."