John Mack, former chief executive officer at Morgan Stanley (NYSE:MS) and senior advisor at KKR, spoke with Bloomberg Television’s Stephanie Ruhle and Matt Miller today about job cuts and compensation in the financial-services industry, China’s economy, emerging markets and peer-to-peer lending.
Mack said that the Wall Street pay debate is “healthy” and “needs to take place.” On CEO pay, he said: “I would love to see you stop beating up on Lloyd and Jamie. I think that would make a lot of sense and I’m in favor of that.”
Berkshire Hathaway’s Buffett On Diversification
In his 2014 letter preview, Buffett states that, far from being a weak choice, indexing can often achieve investor's goals far more easily than complicated picking strategies. This is a special guest post by Robert R. Johnson, Ph.D., CFA, CAIA. He is a full professor of finance at the Heider College of Business at Creighton Read More
*ALL BANKS OVERHIRED DURING BOOM TIMES
*MORTGAGE BUSINESS ON WALL ST. LESS THAN HALF PRE-CRISIS
*WALL ST. COMPENSATION DEBATE IS A `HEALTHY DEBATE’
*WALL STREET STILL PAYS YOUNG PEOPLE VERY WELL
*PUBLIC SHOULD STOP `BEATING UP ON’ BLANKFEIN, DIMON
*PRE-CRISIS RETURNS JUSTIFIED HIGH PAY AT THE TIME
*BANKS STARTING TO TAKE NOTE OF LENDING CLUB
*SOME PIECE OF INVESTORS’ PORTFOLIO SHOULD BE IN EMERGING MARKETS
*QUANTITATIVE EASING HELPED THE ECONOMY
MATT MILLER: And still obviously an incredibly busy guy. It’s not like you’ve gone into full retirement here–
STEPHANIE RUHLE: Not even close.
MILLER: I was looking at the things that you’re doing, advising KKR & Co. L.P. (NYSE:KKR); Glencore on the board at Rosneft’ NK OAO (MCX:ROSN), on the board of trustees of New York Presbyterian Hospital. So still an incredibly busy plate for you.
JOHN MACK: Well I don’t believe retirement–
MILLER: No golf?
MACK: You know it’s interesting, when I left Morgan Stanley (NYSE:MS) in ’01 I had no plans. And I played golf literally 4, 5 days a week. After about 3 weeks I called my wife, I’ll leave out the expletive, I said, I hate this game. If all you have is golf, it’s a boring life. So I’m over the moon to be retired but I’m really active.
What I really enjoyed is working with small startups. I’m involved with Lending Club. I’m involved with a company called Lineage which is cold storage which is going to be the number two cold storage facility in the United States.
MILLER: Bitcoin cold storage?
MACK: No this is cold storage of beef, poultry and things like that.
MILLER: I gotcha. Listen, we’re going to talk a lot about that throughout the program. But I want to ask first about the Barclays PLC (NYSE:BCS) news today. Because you had a similar experience when you went in to take over at Credit Suisse Group AG (NYSE:CS) First Boston, you had to instantly let go of 10,000 employees. And here you see Antony Jenkins doing the same, and a lot of analysts are saying that’s not even enough. How difficult is that?
MACK: Well it’s very difficult. I mean any time you’re asking people to leave their job it’s very difficult. At Credit Suisse Group AG (NYSE:CS) the thing that made it, not easier, but made the decision a clear decision, was if you go back, they had just merged with DLJ. And in that merger there were very few layoffs. I think the only layoffs that took place was in the division that Brady Dugan ran in the equity area.
So when you went in and you saw all the duplication and no one being, kind of saying, does it make sense? We put these two companies together, where are the synergies? So I’m not saying it was easy, but it was obvious. And that’s what we did.
RUHLE: John there was, as you’re saying, much more fat in the system. When you look at Barclay’s laying off 10,000 people since 2008:, that’s all we’ve seen happen. Do you wonder who’s left to fire? The business is about human capital.
MACK: Well it is Stephanie but at the same time you need to look at the volume of business. If you go back when the real craziness was going on, 7 or 8 years ago, we were hiring and busy and wanted to hire more people. Just look how many people were hired out of the colleges in the analyst programs. How many MBAs were hired out of the graduate schools?
The business has changed. There’s, we’re less risk in the business. The mortgage business is half of what it used to be, maybe even smaller than that. You think about the global economy that gives you some insight there’s opportunity. But we all over hired during the boom years and I think it takes time to adjust and that’s what they’re doing.
RUHLE: How do you think banks keep talented people employed in areas like mortgages or leveraged finance which are inherently risky businesses?
RUHLE: If I was the top talented structured products guy, why would I want to do it at a Morgan Stanley or a Credit Suisse?
MILLER: Instead of KKR?
MACK: Well the answer to me is it’s all about the leadership of the company. And the message you send and the opportunities you give. If you treat people fairly, even though markets may be slow or even in some point, kind of stopped, people will stay. It’s how you treat the people who work for you. And it’s not just about money; it’s a lot more than money.
MILLER: But it is about money and we did see Antony Jenkins as he’s firing 10-12,000 people, he’s still increasing the bonus pool by 10% because he says he’s got to keep people there. Lloyd Blankfein talked to us about this. Listen to what he had to say.
(BEGIN VIDEO CLIP)
LLOYD BLANKFEIN, CHAIRMAN, GOLDMAN SACHS: The earnings of an institution have to go to compensate labor for their services but also have to compensate the investors and give them a return on capital. And to the extent you have a higher capital requirement you’re going to have to allocate more of your earnings to paying that. And so that’s resulted in lower compensation. But you still have to compensate your people. It’s still a market. We still have to compete in the marketplace for talent. And that’s what we do.
(END VIDEO CLIP)
MILLER: So Goldman Sachs Group Inc (NYSE:GS) obviously a different story than the earnings we saw out of Barclays which were poor to say the least. But you’ve got this back and forth between Washington and Wall Street, between the public and Wall Street. What do you think about the compensation debate?
MACK: Well listen, it’s a healthy debate and it needs to take place. It should take place almost every year because you need to look at it. But at the same time, if people talk about the cuts in compensation, the last time I checked, this business is still a business that pays people extremely well.
So if you’re a young man or young woman coming out of graduate school or undergraduate school and you can get a job at one of these firms where you can learn a great deal, especially if you’re an analyst, an analyst being a two-year program. And the money you’re being paid I think is very competitive and probably more competitive than a lot of the industry’s that people go to work for.
RUHLE: Well then let’s talk about CEO pay for a minute.
RUHLE: Because we watch bank CEOs get kicked and criticized day in and day out for their compensation. But the highest paid CEOs out there aren’t in banking. You’ve got Larry Ellison almost $100 million, Elon Musk $78 million, we just saw what Eric Schmidt got paid last week. When are we going to stop, or should we stop beating up what the Jamie Dimon and Lloyd Blankfeins of the world get paid? Maybe that job is just worth $20 million.
MACK: Well number one I would love to see you stop beating up on Lloyd and Jamie. I think that would make a lot of sense and I’m in favor of that. I think the names you just put up are kind of a hot areas. It’s technology. And people see how technology’s really changing their lives. They also see how the stocks have performed in these companies and the returns they’re making.
So we could argue is that too much or not too much? I guess clearly I would say it’s something that needs to be talked about. And I think it is being discussed. But as long as shareholders reward performance, what these companies have delivered, we can argue is $10 million too much or $1 million too much?
RUHLE: But John is it fair to say that technology changes people’s lives? Doesn’t banking? If it wasn’t for banking fueling the American system, the economy, lending to small businesses, we couldn’t get anything done.
MILLER: Not just America right? All of society. I mean banking is really the keystone to growth.
RUHLE: But we just want to hate on it 24/7.
MACK: Well listen, during the go-go years and this goes back pre-2008: there’s no question that Wall Street was knocking the cover off the ball. And there’s also no question because of competitive pressures and returns I mean at Goldman Sachs a couple times their earnings were 35-40% return on equity. At Morgan Stanley a couple quarters we were over 30%. When you’re doing that kind of return for investors, I think you can justify some of these payments.
But at the same time, we have to be sensitive to what’s going on in our economy. And I think that’s the point you’re trying to make Stephanie. That you know we’re making all these guys rich or richer but how about those that are unemployed? How about those who are at minimum wage? And the debate is going on now about minimum wage. So I think for the first time at least in my career, my retired career, it’s clear we need to focus on the social issues and what does it do to the fabric of this country?
MILLER: Well it’s interesting. I think for the first time in my career I see real challenges to Wall Street on a number of different levels. And a couple of them you’re involved in. I’ve been reading a lot about Rev lately, I’ve been talking a lot about Bitcoin lately. These offer kind of alternatives to the way Wall Street does business. And then the Lending Club. I mean this whole idea of peer to peer lending.
RUHLE: How’d you get involved in that business?
MACK: So when I retired I called–
RUHLE: Banker’s enemy, Lending Club.
MACK: I called Mary Meeker and Mary had left Morgan Stanley as our analyst in technology and went to Kleiner Perkins. I said Mary I know very little about technology I would like to be involved with companies who use technology to build their business. And that’s how I met with Renaud Laplanche and the Lending Club.
RUHLE: Do you think that Lending Club, that banks should pay attention? I mean what Lending Club is doing on some level are eating banker’s lunch and they don’t even realize it.
MILLER: All of these companies are right? All of these companies are eating into the profits that banks make. Even in their job as a utility.
MACK: Right. Well you know, you think after the 65 you have a lot of knowledge. I remember calling Renaud and said Renaud what I don’t understand is how are the banks ignoring you. And he said John think about it. We’ve just crossed a billion in outstanding loans. They’re in the trillions. We don’t, thank God they’re not paying attention to us.
But recently there was an article on either the front page of “The Journal” or “The FT” where Wells Fargo & Co (NYSE:WFC) made a comment to their employees not to put money into the Lending Club system because it’s hurting their business. So they’re beginning to take notice of what’s going on.
MILLER: I see, they’re telling their own foot soldiers don’t help out the enemy here.
MACK: That’s what the paper said. So I can’t confirm that, but it was in the papers.
MILLER: All right I’ve got to ask you quickly about China and commodities because you’re an advisor to CIC; you’re an advisor to Glencore on the board there. It seems like the bank businesses are getting hurt by commodities trading. There’s concern about an emerging markets crisis. Concern about the Chinese economy. What’s your view of that?
RUHLE: But Glencore never gets it wrong.
MACK: Well I don’t know about that. They’ve got a great CEO in Ivan Glasenberg. Listen I think a lot of it’s predicated on what’s going to happen in China. So China hits their target of 7.5% growth, I’m really optimistic about the commodity business. If they’re down at 5% I’m really concerned about the business.
MILLER: But that’s the driver.
MACK: That’s certainly is the driver on copper and some of the basic commodities, no question about it.
MILLER: And the emerging markets? What do you think? Because Goldman Sachs, I mean Blankfein also has come out and said he thinks long-term that’s a great play. And Coots, the queen’s banker, said they like Goldman Sachs too. I mean sorry, they like emerging markets too.
RUHLE: I was going to say, they like Goldman Sachs too?
MILLER: I’m getting all of my–
MACK: I think they like Morgan Stanley, but that’s all right.
MACK: It’s clear to me as I’ve been in the business for a long period of time, if you had invested in China, in Brazil, in parts of Africa and stayed with that investment over a long period of time, you would have done extremely well. And I would have bet beaten the markets here in the US, or more developed markets.
Listen to me it’s obvious, when you have countries that have the kind of growth potential that they have, you have to have some piece of your portfolio dedicated to emerging markets.
RUHLE: Some piece, maybe not all of it.
RUHLE: And still with us is John Mack, he’s a former CEO of Morgan Stanley. John what I’d love to ask you is, what are people asking you? They’re picking up the phone, they’re calling, they’re saying help me with this, help me with that. Do CEOs care that much when they hear from Janet Yellen today? I know economists do.
RUHLE: To the broader economy, do they want to know what does she have to say? What direction are we headed in?
MACK: Absolutely. I mean I think it’s critical to see what she is going to say. I don’t think there will be any surprises in this testimony. And I think you know the Republicans will go after one side of it, the Democrats on the other.
But if you’re running a company in this country or I’d argue around the world, you want to hear what’s on the new Chairman’s mind. And if this gives them insight into that, how could you not watch it and pay attention to it?
MILLER: How important is it, I mean you have the emerging markets complaining before right? That our interest rates and QE were too low and that was ruining their capital flows and now they’re complaining that we’re pulling back too quickly. How much do you think she pays attention to what you pay attention to?
MACK: Look I think she pays attention to that. At the end of the day, we need this country to grow. We need to create jobs. And the priority to me and I would hope to her and others, is to do that. So people are always going to complain they want more or they want a lot more. She has to do what’s best for the United States and I think if the country does well, clearly get unemployment higher, we start buying more goods and services, a great many of them come from overseas, it helps other markets.
RUHLE: But do you actually believe the company’s doing well when you look out there in the broader economy, QE clearly helped the market, helped investors. The last day of the shutdown the Dow was up 250 points. The only people that helped was the ultra-one percent. So what does all this Central Bank intervention do?
RUHLE: You disagree?
MILLER: Look you’re the one percent right? Don’t you pay a lot of people to do services for you? Don’t you have–
RUHLE: He’s always looking for ways to dog on me.
MILLER: No I’m not dogging on you. Me too. I mean I buy a lot of stuff. I just ordered a new truck. I mean, the one percent don’t just sit on that money and do nothing with it.
MILLER: I’m not saying trickledown economics before I get a lot of hate mail.
RUHLE: But does Quantitative Easing really help the economy?
MACK: I think it does, absolutely. I think one of the critical things is to keep interest rates in this range so we can use that capital to build some of our businesses, to put more money into technology. We’re going to be talking about food later. There’s a lot we can do in the food area.
So I think to keep rates low, to get this economy growing makes tremendous sense. I think one of the issues for us is about confidence. I don’t think it’s about interest rates. When you look what’s going on, the debate that takes place in Washington, people are saying, wait a minute, which way are we going? We need clear direction.