First on CNBC: CNBC Transcript: Morgan Stanley Chairman and CEO James Patrick Gorman speaks to CNBC’s “Squawk on the Street” today
Morgan Stanley CEO James Patrick Gorman on bringing workers back to the office
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
JIM CRAMER: I mentioned before, it is our job to put these bank earnings in some sort of, let's just say, so you can understand why one goes up and the others go down. Morgan Stanley posted second quarter results that blew past analysts estimates on stronger than expected trading revenue. Let's get some context here. Joining us now first on CNBC is Morgan Stanley Chairman and CEO James Patrick Gorman. James, It is always great to see you.
JAMES PATRICK GORMAN: It's great to be with you, Jim, thanks for having us.
CRAMER: All right, James we have seen some terrific top line growth, much more than I thought, from almost all the banks. But a lot of that growth is credit based. And that means it's got risk. Yours is fee based, which to me is more constant and sticky. Tell us about the changes you've made and why your bank should not necessarily be valued like others.
GORMAN: Yeah, well, thanks for that observation. Couldn't agree more right now. But you know, the whole business model change over the last decade was to move us into stable recurring fee-based revenues to give us the balance and at the same time, to have a world class investment bank which has always been our core DNA. And this quarter you saw exactly the combination of both of those. So, you know, we haven't been in the unsecured credit – consumer credit space. We're very small in emerging microcredit space we're basically nonexistent in small business, middle market lending, they're not the businesses – they're not bad businesses but they're not our businesses. So when we produce the revenues, we didn't have the credit losses that that would typically come in this kind of economic scenario.
CRAMER: And that's what I want to drill down on. When I looked at the provisions of the other banks that reported, actually they are rather large. Some people just said, Jim, you're being – we have to be conservative. But your provision is actually remarkably smaller versus the other banks.
PATRICK GORMAN: It’s just business – I mean, if we had a large card business, for example credit card business, we'd have provisions that would reflect that. We, you know, most of our wealth management lending is to our existing clients, highly secured, collateralized. You know, we had basically no defaults across all of our – no provisioning across all of our franchise. But that is the business model, it is with intent.
CRAMER: You've spoken to me many times about the idea of a wealth management business that doesn't have government risk, a wealth management business that is really sticky. So let's talk about the E-Trade acquisition. I feel in many ways that E-Trade is a feeder. It's the place where people cut their teeth, they get started. You don't want to seem to wait until people get wealthy like the old days to get an account at Morgan Stanley. Will E-Trade be part of a continuum where you get them young, and then they continue to grow and you hold them all along?
GORMAN: Yeah you know, I mean listen. People find their and have their financial wealth managed in three different forum basically. One is some sort of advice, financial planning. We've nailed that, we've got that through the combination of Smith Barney, which we built and the last decade. That business is doing great, two and a half trillion of assets. The second is through their place of work. It's usually on the back end 401k type plan, stock option plan. So those kinds of businesses and we've now got that through the Solium acquisition and E-Trade has that and combine those two together we're going to be number one I think in the whole stock playing business in the country. The third is the digital platform, and they tend to be as we've noted over the years either active traders, options traders, emerging investors, and they have a younger profile. And that's what E-Trade has so it gives us a channel into that investor base which we didn't have before. Some of them will over time become full service advisory relationships, many of them won't and we're agnostic to that. So it's a really terrific opportunity to participate in some of the past growth in this segment.
DAVID FABER: Hey, James, it’s David. You know, let's stay on a E-Trade for a second. You said during the call that they've attracted hundreds of thousands of new accounts you also said it's real money, not just kids playing. Which I would assume is maybe a reference to what we've seen in this Robinhood phenomenon, this level of speculation in certain stocks in the market. What do you make of that when you say not just kids playing?
PATRICK GORMAN: Yeah, I mean I was probably being a bit flippant, certainly not a heavy dig at anyone. But you know, there's been a bunch of stuff written and you guys probably talked about a lot of people sitting at home. You know markets going crazy, everybody gets excited, people put their $2,000 of savings in. That's not a strategy, right? We saw that in 2000 with the .com thing. We're seeing a little bit of that now. E-Trade is a more mature business model than that. It has it has hundreds of thousands of active traders, professional traders, it has, as I said, the workplace business and people whose money goes into stock plan, vest into their E-Trade account, and then it's got the folks just who want to invest and want to have a relationship online. What's different about their business model, I think, from some of the pure electronic plays that have started up in recent years, is the dollar asset per account. They're attracting several billion dollars a quarter right now, almost to the level that we are across all our wealth management business. That's what I mean by real money.
FABER: Right. When are you closing that deal?
GORMAN: Let's see I think the shareholder vote with ETrade is eminent site today July, 17 so its tomorrow. Just looking at my calendar here have been a bit distracted. We hope to get fed approval. And, you know, highly confident we'll get the approvals. I'm not sure the exact date David but somewhere, somewhere in probably the first half of the fourth quarter so it's coming really soon. And it's accretive to our deposits, it helps our funding profile and helps our CET one ratio so you know I'm really excited about this deal I just think, I just think it's, it's a great transaction it was stock for stock. We've got to know their management team I really like these folks I think it's just culturally going to fit it's going to be great.
FABER: James All right, I want to switch to the financing markets which were just incredibly strong I want to get your take on it but more importantly, what are your expectations for the second half of the year. It would seem almost impossible to maintain the same rate of momentum, and activity that we saw for that three or four month period, or is it possible.
PATRICK GORMAN: No, I think it's possible, it's highly unlikely though and, you know, I think this quarter is started off, you know, very solid but you know not at the level that we're in trying to think what the most sort of ebular month was I guess it was Sorry, April early May. You know, there's still a lot of financing going on. A lot of m&a deals now getting signed up which is interesting that sets up you know the pipeline for next year we won't see those revenues in the back half of this year, but we're going to see them next year and you know you know somebody said recently, m&a doesn't go away. It just takes it takes a hiatus in times of absolute uncertainty because CEOs don't want to commit as the economy continues to strengthen and as hopefully we get past the worst of COVID although the outbreaks in the south and western parts of this country a troubling. m&a will come back more strongly so do I think we're going to repeat the first half now I don't do I think we're going to have a four second half now I don't, I think our business is very stable.
CRAMER: James I was listening Brian Sullivan this morning, and 25th anniversary of Amazon if you put $10,000 in Amazon then you have 12 million.
PATRICK GORMAN: I hope you did that Jim.
CRAMER: I bought $10,000 worth of books not stock. Have we seen the peak in indexing, you've got great advisors, eTrade got a lot of interesting things to be able to help you pick individual stocks, there is great wealth being created, if you bought apple or Facebook and Amazon but if you just bought the s&p, not so not so well. Are you set up for this new generation of, of people who are just really enthralled with individual stocks, and we don't talk about them that much.
GORMAN: Yeah, I think you know we are there's clearly a pipeline to the next generation which is really exciting and, and people want to be educated about the financial markets we can help both in the education the research, and obviously we bring so many companies to market you've got pipeline you've got flow you've got products, but just talking about active management, I mean, I just want to give a call out to Dennis Lynch. Unbelievable. His growth funds what he's done. Number one again this year, across the whole of Morningstar, you know you can create alpha through really smart long term investing and Dennis and his team have done an unbelievable job and that's created enormous wealth for a lot of our clients so there are ways to navigate these markets rather than just being an index now it's I've always said if you've got $39,000 to invest, you don't mess around with individual stocks, you should be an index and, and unless you're you know very young and you don't have financial responsibilities. But as you start developing your portfolio, you can create alpha over time and our platform does that as well.
CARL QUINTANILLA: James you were quoted on the call this morning saying that you'd love to expand the dividend in time, and get back on the buyback train. We don't want to sit on this capital, you said, Can you talk about the likelihood of either of those these two things happening.
PATRICK GORMAN: Yeah, it sounds like Carl I can't see you guys on my screen here but, yeah, you know, you know Carl its interesting our dividend is a buck 40 share we’ve got a Billion and a half shares so our total payout is about to be a little over $2 billion. We just earned $3 billion. This quarter. You know, first quarter we're, we're roughly 5 billion through the first half of this year. So we've made almost two and a half years of dividends in the first half of this year. The Federal Reserve results showed we had about 300 basis points of excess capital our CT one ratio. Will it create further capital with the consolidation of ETrade in the fourth quarter. I'm highly confident we're going to we're going to accrete earnings in the third and fourth quarter of this year. So we're already sitting on, you know, six to 10 billion of excess capital, we create high ratios with CT one from etrade. We've moved, we've added another 3 billion net of our dividend already this year, so you know we're talking about 10 to 15 billion of excess capital Plus we're still arguing for some relief from the PP and R not to get too weedy about it, but the way it calculates FA compensation. So yeah, we need to do something with this we can invest in our business. We want to have world class technology we're going to invest in that we're investing the next generation of investors that Jim's talking about that's critical to our future growth, we also should increase that dividend, and we should be. We should be back on that on the buyback trail, not just yet. Let's get through the new stress test in September. Let's see how the economy performs in the next three to six months, but 2021, you know, Morgan Stanley should be doing something this capital for the benefit of our shareholders and for our clients.
CRAMER: Let’s talk about the growth side because I think that no one's ever. No one's going to give you credit for for a future dividend raise but they should have been given credit for something you mentioned, is a throwaway which I think is one of the most exciting acquisitions you've made, which is the solium, because that again is sticky assets, and we all follow the stock market here, or else wouldn't be watching tell people what workplace wealth solutions mean because that's one of my favorite businesses that you have.
PATRICK GORMAN: That's a great question we you know, there was interesting story we had workplace business. We werent managing a grade. We outsourced it to solium which is company based in Calgary in Canada. They did an unbelievable job and I don't know if you remember the ads I remember growing up in Australia watching things like I am, with the razor company and he says I like the razor so much I bought the company. And I always love that idea well solium did such a great job managing our stock plans, we went and bought the company. And so we bought them back paid about three 400 million premium on the Tokyo Stock Exchange. A lot of people thought of as expensive, I could care less. It was, it was a rounding error. What we're buying was a platform combined with etrade that makes us number one in the workplace. So what is workplace it's where you have money in a stock plan or stock options, and those best etrade then converts them into trading account, we didn't. They went to whatever bank or institution somebody had a relationship with. We can then provide research we can provide product, we can engage with the C suite to manage their personal wealth. It's just a great growth story, a lot of money comes to where people are working, and we want to be part of that channel fidelity's done a great job in that space. We want to do a great job in it.
CRAMER: James, James real quickly. The, the world we live in right now, you know, and the world that we've been a part of, you're working from the office I can see it. How many people are going to be working from your office let's say at the beginning of this year, how are you viewing things at this point.
PATRICK GORMAN: Yeah, it's it's it's tough day but I came in, I've been coming in a day a week the last few weeks just to get in the flow do the temperature tests go through the app that we ask all our employees to do you know see how the elevators work I want live and experience it a little bit and I want the senior management to do that. I don't want to be here all the time that's not because I can't be. But I don't want everybody to feel like they need to be in the office all the time. I'm not sure the infrastructure in the city, and then that our building can absorb the number of people that were working here, pre covert until we have some level of immunity or treatment, give you a sense of numbers up until the start of July, we had about 250 people in this building, including a lot of security and healthcare workers on a base of 5300. Today we're probably. I don't know mid three hundreds will be, you know, 600 to 1000, I think through the early fall. And, you know, my long term sort of started the a globally is we'd have about 50% of our employees in the offices, not every day of the week, but about 50% of employee hours work would be in the offices. But, you know, a lot of ground to cover between now and then so all right we're gonna go really slowly David that plan is working well as people working well. What I care about is feeling safe and sound.
CRAMER: Unfortunately James, we're going to have to cut short. Congratulations on a good quarter, and we will talk to you soon.