WHEN: Today, Friday, December 13, 2019
WHERE: CNBC’s “Closing Bell”
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Morgan Stanley Chairman and CEO James Gorman and CNBC’s Wilfred Frost on CNBC’s “Closing Bell” (M-F 3PM – 5PM) today, Friday, December 13, 2019. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/12/13/watch-cnbcs-full-interview-with-morgan-stanley-ceo-james-gorman.html.
All references must be sourced to CNBC.
WILFRED FROST: Welcome back to "Closing Bell." I’m joined now by the Morgan Stanley Chairman and CEO, James Gorman for an exclusive interview. James, great to see you. Thanks for joining us.
JAMES GORMAN: Thanks for having us, Wilf. Great to be back.
WILFRED FROST: Great to have you here in person in the Stock Exchange. you managed to change all the tickers to Morgan Stanley in the background. Someone on your team did very well.
JAMES GORMAN: I thought it was always that way.
WILFRED FROST: Not quite. Not quite. But anyway, great to have you with us. And, as we were just discussing, I caught up with some of your peers earlier in the week at a banking conference. And the tone there was very, very positive on the U.S. consumer, perhaps less so, but coming off the lows for corporate sentiment. Is that how you see things at the moment?
JAMES GORMAN: I mean, it’s hard to argue with it. We’ve got 50-year unemployment lows. Consumer balance sheets are in good shape. And obviously, the corporate sector, you know, after the tax cut, there was a major surge. A little bit of trepidation coming out of the summer with the trade talks escalating and the election, you know, discussions obviously creating more uncertainty. So, I think the corporate sector has come off a little bit. Consumer remains very strong. So, yeah, I saw those interviews and I would agree with them.
WILFRED FROST: Do you feel like this Phase One trade deal that we’ve been discussing all day on CNBC, does that drastically improve the outlook for the corporate sector next year?
JAMES GORMAN: No. No. Drastic -- it would take a lot more for a drastic improvement. And listen, it’s good we got a deal, it looks like, or at least some resetting. But I think, Wilf, we’re going to be talking about this for ten years. There are going to be dozens of deals done over the next ten years.
WILFRED FROST: In terms of China’s outlook for the year ahead, are you optimistic that it can help their economy as well?
JAMES GORMAN: Well, you know, China needs to keep growing. And in aggregate terms, I think it accounts for something like 40% of global growth. It’s a $12 trillion economy. So, percentage wise, it’s slowing a little bit, but it needs to keep growing. And part of that growth is to have trade taking place with the major industrialized and consumer nations. So, the Chinese needs this as much as the Americans need it.
WILFRED FROST: Earlier this week, my colleague from David Reid from CNBC.com had a story that said you guys were making quite a few jobs cut. Gauge for us whether that is because you’re increasingly bearish about next year or it’s part of the usual churn?
JAMES GORMAN: You know, it’s a little bit of caution. We’re later in the cycle. We’ve had a terrific run for the last several years. We’ve had strong growth. And this was a time to sort of reset the table a little bit. So, part of it was that. Part of it was a lot of the investments we made post becoming a bank in our infrastructure have now become business as usual. So, we’re able to cut back on some of those investments. But, listen, you know, I have -- I hate going through these exercises. I obviously feel tremendously for the folks who are affected by it. But at the end of the day, it was something like 2% of our employees, year over year. So, you know, it’s a big number of individuals. And at a personal level, it’s obviously, you know, a really big event. But for Morgan Stanley in the aggregate, it’s just prudent, you know.
WILFRED FROST: On the Fed, when we sat down for our last interview in June, you said, quote, I personally would be more conservative in cutting rates, because I don’t think you want to use your firepower too early. So presumably, you disagree with the cuts we’ve seen since then?
JAMES GORMAN: Listen, the market priced in those cuts. I think there was enough uncertainty in August in particular, September where at least a cut is deserved. I think we’re about right now. I don’t see the need for the Fed -- it’s hard to argue with inflation where it is, with unemployment where it is, with GDP growth where it is, for further rate cuts. So, yeah, I would hold whatever firepower remains. And I think that’s what the Board of Governors just said.
WILFRED FROST: if we get into some more Morgan Stanley specifics, are you prepared now for a period of elevated competition and with it, pressure on margins within wealth management? Whether that’s because of the broker price wars, the consolidation of Schwab TD, some reorganizations from your rivals, JP Morgan/Goldman Sachs.
JAMES GORMAN: Yeah, this has been an industry which I’ve always worked in and been part of for several decades now. There’s always competition. Right? There’s always something going on. The electronic trading going into zero pricing on the equities trades—that was coming. Right? That was inevitable. No, we have the advantage of being the scale player, one of a couple of scale players in the industry. We can make the investments in the technology and the infrastructure you need to be world class competitive. And I think, game on. I mean, it’s not surprising me that others are waking up that wealth management is a phenomenal business.
WILFRED FROST: If this recent price war, and you mentioned you guys have the scale to invest in the technology, if it was parked by the likes of Robinhood entering, who are the ultimately winners? Weirdly, has it kind of played into your hands a little bit?
JAMES GORMAN: Well, it depends on the client segment. I’ve always said, if you’ve got, you know, $30,000, you don’t and shouldn’t have a financial adviser. You shouldn’t have a complex portfolio. You should be invested in an index fund. If you’ve got $30 million, it’s an entirely different ball of wax. And we have over $1 trillion of assets with clients who have at least $10 million, just with us. So, they’ve got multiples of that in their net worth. So, you know, the winners are built around, who is the best in class at whatever the vertical you’re working in? In our case, full financial advice, workplace marketing through the Solium acquisition, that’s where we want to be best in class.
WILFRED FROST: In terms of how your clients feel at the moment, do you think they’ve got large amounts of risk still to put on the table, or are they fully invested?
JAMES GORMAN: Definitely not fully invested, have not been very active for several years. I’ve been honestly surprised at how muted the trading activity has been among the retail client base. There’s some sign that it’s picking up a little bit. I think the trade news, as we get close to the election, the vote in the UK, I’m sure we’ll talk about that, all of these uncertainties, as they start to fall away, the individual gathers their confidence. And I think that’s what we’re starting to see.
WILFRED FROST: There was a vote in the UK? I’m joking. We’ll come back to that a little bit later. In terms of -- we mentioned Schwab, TD. Schwab has clearly swooped for TD whilst they were at depressed price. There were other players out there at depressed prices. Have you considered any of them to help expand your scale?
JAMES GORMAN: We love the business we’re in and what we’re doing. I mean, we always look at strategic stuff. That’s what you’re supposed to do. But we don’t do it based upon a point in time pricing transaction. We do -- we make our strategic choices based on where we want the company to be, you know, 10, 20 years from now. That’s why we bought Smith Barney back in 2009. We believed that the wealth management space was compelling, we wanted scale, we moved quickly.
WILFRED FROST: Are you an admirer of E-Trade’s corporate stock plan business?
JAMES GORMAN: They have a very good stock plan business. Yeah, they do. And they’ve done a very nice job with that. You know, Fidelty has a great plan business. There are others out there on the marketplace. And as I said, we bought Solium now. Renamed Shareworks at Morgan Stanley. And it’s great. It’s a great way to reach individuals through the workplace.
WILFRED FROST: So, you’ll stick with what you’ve got already in that space? Organically?
JAMES GORMAN: Yeah. We love what we’re doing. We’re building organically. We’re winning business through it. It’s been--honestly, it’s been, I think this will go down -- it was a relatively small transaction. We paid a lot for it at the time, it was considered expensive for what it was. I think it will go down as a total home run.
WILFRED FROST: I want to talk about the WeWork IPO, if I may. And you guys had been touted to be likely one of the leads on that IPO, and then didn’t end up being a part of the S1 when it was filed. Why not?
JAMES GORMAN: Well, I can’t – obviously, you know I can’t talk about an individual transaction. So—
WILFRED FROST: Were there aspects that you were put off by? That the valuation was too rich or the corporate governance wasn’t good enough?
JAMES GORMAN: You know, again, it wouldn’t be fair for me to go into that. But clearly, there was a misalignment between how a lot of private securities were being priced at and what the public money actually wants to pay for it. That’s what the IPO process is. It’s what you guys do. It’s what happens on the Exchange floor every day. It’s finding transparency, matching the buyers and sellers. What founders want to sell their company at, what buyers are prepared to sell their company at can be very at odds at different points in the cycle. And I think that’s what happened in that case.
WILFRED FROST: Do you think it’s marked a turning point where corporate governance will now have to be better before an S1 is filed? Valuations will have to be a little bit more reasonable?
JAMES GORMAN: Yeah, it’s a fair question. I mean, there are always cycles. And you get these spurts of sort of -- well, Greenspan said it best, irrational exuberance. We had it ’99 going into that time period there. We had it back in ’85-’86. There are these corrections. And I think we have a little bit of that with some of these companies. I mean, you’ve better have a very, very compelling growth story if you’re not making money. Right? At some point, long-only investors want to know that the company is around for the long-term and is making money. And I think there’s been some reassessment from that.
WILFRED FROST: Switching focus, I understand that you had dinner with Goldman Sachs’ CEO David Solomon at a restaurant in the West Village called Don Angie on the 14th of November. What were you guys discussing? Business or pleasure?
JAMES GORMAN: That’s hilarious.
WILFRED FROST? Is it true?
JAMES GORMAN: Were you at the restaurant?
WILFRED FROST: I wasn’t. But one of my colleagues was.
JAMES GORMAN: There’s no hiding in this city.
WILFRED FROST: Is there a merger?
JAMES GORMAN: No. That would be great. No, David’s a great guy. When he became CEO, I called him, and as Lloyd did to me when I became CEO. We’re competitors, but we have a lot of things we have to share in common. And we said, let’s get together for dinner. And he actually picked a restaurant where the Maître D’ is an Aussie from Tasmania, Damian, and it’s one of my favorite places. We had a nice time.
WILFRED FROST: But this is fascinating to me. So, you guys, Morgan Stanley, Goldman Sachs, as fierce a Wall Street investment bank competitors as there are, but you’re also mates off the kind of Wall Street?
JAMES GORMAN: Well, we’re counterparties. We’re in a lot of transactions together. We have great respect for each institution. I have for their leadership. I’ve known their CEOs going back many years. You know, listen, you compete, but you’re not unfriendly. We both need both of us to succeed in this marketplace. It’s important for exchanges like this, for taking companies public. And the benefit of having a personal relationship is when things do happen between the institutions, it’s a phone call. Right? It’s a very simple phone call. And I wish David well.
WILFRED FROST: One area where you guys might see eye to eye is when the political spectrum focuses on investment banks. And when we spoke in June and I was asking about the spotlight, you said, quote, we, meaning banks, we’re not the problem. And you went on to say: in a political debate, somebody is always going to find somebody to be angry at. Six months ago, it felt like in fact tech was the focus. Do you think things have pivoted back and that Wall Street banks, as we go into an election year, are back in the crosshairs?
JAMES GORMAN: I don’t think so. You know, I think there are a lot of issues that should be surfaced going -- you know, and will be debated around not just the financial sector, the health care sector, technology sector, the energy sector. So, no, corporations are part of the political dialogue. I don’t think the banks in this particular cycle are especially prominent nor should they be.
WILFRED FROST: You mentioned the UK election earlier. Does that clear up whether or not Morgan Stanley wants to remain based in London?
JAMES GORMAN: We would always remain based in London. We’ve got 5,000 employees there. We’ve been there for I think nearly 50 years. It’s a huge operation. London is either number one or two most important financial center, as you know, in the world with New York. That was never in question. We’ve moved a couple of hundred employees so far on to the continent. We might eventually move about 400 out of 5,000. I’ve felt more for the British economy to have clarity around the path forward with Brexit, to have a majority government that can be decisive, a set of policies which I think will stand up for economic growth. I thought it was constructive.
WILFRED FROST: And so, you could see that feed into a better European economy next year or just a UK-only economy?
JAMES GORMAN: I think there’s still -- Wilf, I think they’re still interrelated. And I think what’s good for the UK is going to be good for Europe.
WILFRED FROST: Let’s talk about the stock price. We talked about this last time, as well. It’s improved since the summer, particularly the last couple of months, but price-to-book value is still at or just above price-to-book. You set your ROE targets, double digit, you’re confident of making them. I mean, if you do hit those targets for the next three to five years, do you think you’ll get a much better multiple than you’ve had for the last 12 months?
JAMES GORMAN: I mean, it’s -- you know, the market’s very short-term can be quite irrational. Long-term, if you think the market’s wrong, you’re the problem, right? So, it’s like the fish in the poker game. No, listen, our stock has had an incredible journey. We’re an $80 billion plus company. At one point in my tenure, I think we were down to $15 billion. So, you don’t want to complain too much. But just rationally, the consistency of earnings, consistency of revenues, we’d never had a $10 billion quarter before 2018. Five of the last seven, we’ve had over $10 billion revenues. And we’ll see what happens with Q4. The company’s in great shape. I personally think the valuations are very low, but you know, ultimately, the market’s the judge.
WILFRED FROST: In terms of the leadership, your number two, longtime number two Colm Kelleher announced his retirement earlier in the year. You haven’t filled the President position yet. Where do we stand on that?
JAMES GORMAN: First, Colm did a phenomenal job for us, going back to the Financial Crisis, CFO through that and as my as my President. Just a great guy. You know, we’ve -- through Morgan Stanley’s history, we’ve had sole Presidents, dual, and none. Right now, we have none. We have a bunch of executives who, I think, are great leaders and we’re developing. And this is giving me a chance without having a President to work directly with them and get more exposure to them and really see what they can do. And I’m look forward to that.
WILFRED FROST: And do you see yourself leading the company right through the next full economic cycle?
JAMES GORMAN: Is that going to happen next week? Or ten years from now? It depends when the cycle is. Listen, I love doing what I’m doing, but I serve at the pleasure of the board. I want to develop a team to replace me. I have no desire to be here when I’m 70 years old. I’m 61, I love it. And I tell you what, I’ll retire when you do.
WILFRED FROST: Okay. Well, I intend to be working when I’m 61. And there’s a little bit of a gap there. But James, always a pleasure catching up.
JAMES GORMAN: Yeah. Thanks Wilf.
WILFRED FROST: Thanks so much. James Gorman, the Chairman and CEO of Morgan Stanley. Contessa.
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