Businessweek Extra - Morgan Stanley's James Gorman

It was cool to catch him at this moment, in part because of everything going on in the world, but we were also catching him candidly coming off chatting with students at his alma mater, and he was thinking back to his time, you know, living in the International House, borrowing a ton of money at high interest rates to get into Columbia, and it was a game changer for him, right, And I really think it was a gut check because we talked so much about some major macro issues, whether

it's interest rates or U S. China trade or the I P. O market. Uh, And he really had some thoughtful, insightful things to say. Here's that conversation and you're with some students just a few minutes ago to take you back to your early days. Yeah, maybe jealous, I mean apart from the sirens, right, but uh yeah, it was like Columbia in the mid eighties and U it was you know, it was a great experience. So it was it was fun. I just did a lunch and learned

class for about a hundred and fifty kids. And they are kids there, they went born when I was a business school here. What do you want to know from them when you're talking with them, because I feel like the world that so many different industries, your industry also going through lots of changes. What do you want to hear from that? Well, it's what kind of cultural what

kind of company they're really looking to work out? I mean, what what what matters to this generation different from my generation. You know, I grew up at a time when Solomon Brothers and Drexel and you know that was all the rage on Wall Street. Is a very sort of hyper intense environment. I mean, these uh young folks, they are much more interested in social impact, um, in the values of the organization and and just trying to share in exchange. How we think about our role in society as as

an obviously global bank. Well, let's go all the way back to your arrived well here on campus. This was after this so long ago, but it was a big move. I mean there, it was defining in a lot of ways. What do you remember most about arriving? And then what did you take? Because you came from Australia and you were a lawyer already, right, yeah, I came. I came

here to sort of change careers. What I remember most is the interest rate on my student loan, which I think is a world of record, right, And I thought I'd died and gone to have them because America welcomed me to come here to learn, to grow, and and I just it was unbelievable. I arrived on a very hot August day. August was that classic New York's sweltering heat, and it just it was on you. It was just it was so exciting on the campus this university, which

is you know, extraordinary. Um, I couldn't I couldn't have been happier, honestly to be given that chance. And that's why I think, you know, immigration, welcoming foreigners, giving them an oportune to contribute. And I'm still here, right, you know, thirty past years later, because you had an experience living in international house, I believe, and so many people are exposed to many different cultures. I mean, you were living in it in a lot of ways. How did that

affect sort of your world view? I used to play chess every Sunday night with UM, a Danish guy who listened to Frank Sinatra with candles on, you know, in the dark, and it was so you know, and one of my closest friends, uh, I was a guy from Leon in France and another guy from Morocco. Uh. So you you you learned to experience the cultures and the

diversity that this world has. And one of the great things about a university like this is it brings people like that together who all motivated, they've all they're obviously uh, they're talented, uh, and they want to move forward. So I thought it was a tremendous experience. Well, having said that, James, I do wonder what you think about kind of the pushback that we're getting, UM from the current administration when it comes to folks coming in from other countries to

study here, maybe start companies here. But it's not that happy an environment or hospitable environment for them right now. Yeah, I mean I think UM this country has always been a country of immigrants, and uh celebrating and welcoming those immigrants and seeing how they've contributed to this society here. I mean, it's it's been one of the great elixas of what's made America different is most countries people are trying to move out of to get a better life.

This is one of the few countries in the world in Australia was like that where a lot of people are trying to get into and I think welcoming those immigrants providing opportunities for them. Obviously having sensible border control, which I support. People shouldn't come here illegally, right, I didn't you come through passport control. You earn your way into this country. You set the tests you I became a citizen. I mean, you do it the right way.

But having as many people as you can bring in talent into the US, I think has been one of the great hallmarks of the success of last century. When you think about talent as well, you know, it used to be a much more prescribed path. That feels like at a business school you went to of the consulting company, you went to Wall Street. You know, you talked about

hearing from the students. When to have a social impact, what do you draw in terms of student and talent from a business school like Columbia, And what's the case you make to them for working on Wall Street right now? Well, there there are. There are great careersm Wall Street. There always have been. I mean, things have and flow. I think the largest recruiter I don't know for sure, but I think Amazon might be the largest or one of

the largest at the business school now. So at different points, the sort of cadence and flow and focus changes as society is changing and as business opportunities are changing. Listen, Wall Street is highly sophisticated, very intellectually interesting, very dynamic because you're in the markets. As you guys know, this is what you do. Um so for a lot of people, not everybody, for a lot of people, who remains an extremely attractive career option. So let's talk about the market

you're in it. We obviously watch a day in and day out. There's so many big macro stories that are out there, whether it's Brexit, whether it's US China trade. How do you see the market, the global market environment right now? You know, it's it's a conundrum at one level, we've got record low unemployment. We do still have global growth. The U S economy, the most important economy in the world, is performing strongly. China is still performing strongly. Um Europe.

Europe is obviously mixed, but it's been mixed for two decades now. UM So one level, the fundamentals are actually quite strong. Uh. At the other level, the sense of confidence there isn't the confidence and there's a sense of inevitability where at the end of a cycle, you know it doesn't have to be you don't. I mean, statistically there is a recession every seven years, right, each year you begin with the fift chance of recession, but it

doesn't have to be. You know, in Australia they haven't had a recession for twenty eight years in a row. So what is there so much pressure though then on the Federal Reserve to continue cutting race? Does that make sense? Well,

because the economy is slowing. The economy is slowing, and you know the job of the Fed is to sort of balance monetary policy with economic outlook and fiscal policy, and you know they should feather rates obviously when the economy is getting hot, their job is to raise raids slow it down and the reverse. So you know, I've supported the latest FED rate cut, and I suspect they'll do one or two more. But then it's time for pose and really absorb this because the problem with cutting

is it's one of the few tools you've got. So if you give it away too easily, what do you have if we have a real problem. I want to go back to something you said a minute ago. It's sort of squaring some of the different elements out there, and especially businesses that certainly seem more cautious with a consumer that isn't showing much signs of caution at all. How do you square those things as you talk to

your customers? And what do you see out there that that could help explain that dichotomy as it were, Well, we're you know, we're we're in a bit of an echo chamber. If you're a business leader, you go to business leadership meetings, we all talk to each other, We sort of, you know, we bounce off each other. So a little bit of it is, Gee, we must be at the end of the cycle the FEDS cutting rates.

We must be about to have a recession. By the way, we've had an inverted YOL curve, which has been highly predictive of a recession. So there's some hard evidence that things are more likely to slow down than accelerat at this point, I don't think there's any doubt about that. So as executives, his job is to think about capital investment over multi years, you would be prudent and being cautious at this point. There's nothing wrong with that. Consumers

aren't yet experiencing that they've got very cheap debt. Housing is starting to recover their consumer consumer credit apart from student loan sadly, is in very strong shape. So the consumer balance sheet is still very strong, and that's why it's lagging where the corporate balance sheet and corporate attitudes are. There implications though, from having rates at such a low

level for such a protracted time. I mean, it's all about finding equilibrium between economic growth and the cost of money. So I mean there are only implications if it creates a bubble, right, that's a cheap money eventually will create a bubble. We're a long way from that now. See any of that. I'm seeing no bubbles. And how do you manage your business given all of those different inputs and and outputs? Then where do you hire, where do you maybe stay steady? Where do you invest? Across the

Empire of Morgan Stanley Empire. Never thought about it. We're just a simple business. Um. You know, firstly, you were very long the US A wealth management business is I think ercent us um and at least half a securities business here. So that's a good thing, right. This is an eighteen treeion dollar economy, strongest economy in the world,

most important economy in the world. I'm happy to be along in the US UM where obviously, you know, we've been aggressively building our Asia business, which is now I think fourteen percent or sell of the company. With the trade talks, things have slowed clearly across parts of Asia, so let's be played out. But but our job is to try and look past one three six months hiccups or slowdowns. Our job, certainly, my job is to think out five plus years, and you know, traders are thinking

every five minutes. I'm trying to think five years and can do that in this environment though, because it does feel like we've been going back and forth on let's say you've got to we've been around three d five years. I mean, we're managing uh, two point six three into people's money. They're not all selling into the market on one day and all buying on the next day. No, things,

things actually move in in small increments. It's it's more things like the public markets and companies going public that you know, or M and A transactions happening or not. But most of our core businesses are relatively immune to what's going on right now. You wouldn't see the impact on our wealth management business greatly at all. Well, let's talk about the public markets, because it's been quite a

year for you really did just like up there. I mean, the public markets have really done something to watch, to say the least, and especially talk about cognitive dissonance. You know between sort of private market valuations and public market valuations. What do you see going on there? Why is that happening? Well, on the other hand, the public markets are record highs, right, so where is the dissonances the dissonances in the I P O markets? And in some ways, you know, some

of these unicorn mega unicorn companies going public. Yeah, I mean listen, there's there's rounds of fundraising. Companies have tended to go public later and don you know, four or five six rounds. Um. With that comes some risk obviously, because you've got a lot of investors have come in relatively late before you go to full public. Uh, Mike, And I think we've seen that in some of you know, some of these companies that look like they're going to go public now lower than what the last couple of

rounds were raising. Um, that's unusual. We haven't seen that for a long time. Um. It's also a function. There was some very frothy money floating around in the early rounds. Has that changed? Do you think do you think the private money is get getting smarter at the market's pretty efficient? Yeah, you know, these people aren't stupid. Who are who are making these investments? These are very savvy people. And and listen that this is this is sort of the corrective

mechanisms that occur. They see a couple of companies go public at lower than whatever their last valuation was. That's a good corrective mechanism. That's okay. Back to the bubble question that starts that pin pricks the bubbles that are out there. But some of those that have come public this year, whether it's an uber, whether it's a lift, you know, came out with a bang, but then it pulled back. So it's the market telling you will, wait a minute, you weren't worth that much or or what

is it? Does? It take some time. With these companies that have been around for a while, they are still not profitable. But I've been around for a long time. How do you make sense of that? Uh? You know, the market can be very stupid in the short run. Um, in the medium term, it occasionally gets things wrong, and the long term you're the one who is stupid, right, So uh you know when yeah, totally when Facebook when public, Um, I went on TV. I can't remember if it was

with you guys or not. Let's just say what it was obviously was you know, I said, this is a great, great new company that has been formed by incredibly innovative people who have created something that didn't exist before. That should be celebrated. The fact that traded at a value in the weeks and months after went public below what people wanted on the day of the issue. Okay, that happens, but look at it. Give it time, give it a year, and now it's it's something like six times the valuation,

you know, in a relatively short credit of time. So we should all wish to have Facebook's problem. So I give this, I give this a little bit of time. I'm not I wouldn't be too too wound up about it. Are you seeing more issues that your team? Are you talking to more people who want to bring more companies to public? How active is it right now? Are they? Are they not bringing them public? Because of this? I

think it's making people more realistic about valuations. You know, for some of these unicorns, I think there's a little reality checkers gone into the system, and that's that's okay. This is what the market does, you know. Fact, to my point, the market in the long run gets it right. The short run is how you find opportunities. When you think about this, uh, maybe overstate a little bit, this negative yield world that that we're living in. How does

that change your view of the market. How does it change the way you may deploy some assets and may deploy some of your teams around the world. Well, I firstly, I've been very surprised at where rates are. I'll just say that up front, I felt the tenure at this point. I'd expected by the end of this year the tenure

would be around three percent. I was dead wrong. Okay. Um, So, you know, a negative yield curve has been historically highly predictive of recession, but as Janet Yellen former Chure Yelling said, uh, it's not necessarily so it doesn't necessarily lead to a recission. Uh So, how does it change our business? It doesn't. You know, We're we run our business based upon what we see going on in the broader economy rather than

where rates are trading on any particular day. And I think in the last week you've seen the tenure recover about ten fifteen basis points, so you know, we'll see you know, I'm curious too about the role of technology finance.

We see it increasingly, so talked us a little bit about, you know, the incorporation of it at Morgan Stanley and where you see it kind of all going, because it's certainly a big part of what they're being you know, taught at the Columbia Business School and more and more so, whether it's algorithms, whether it's engineers coming in and coding, where do you see it all playing out? It's interesting.

I just came from our monthly Risk committee meeting to our meeting this morning, and we had a whole section on electronic trading and um, what we're doing in that space and how it's bleeding from equities into the fixed income space. Um. You know, the technology has been driving Wall Street dirty little secret for a very long time. You know. We set up our first electronic trading businesses in the mid nineties, and it's like everybody suddenly discovered

technology because of fintech. Um, there's a lot of innovation going on in the fintech sector for sure, and we're partnering with a lot of those companies. But we are you know, we spend upwards of four b and all of some technology. We have centers of competence in machine learning, robotics,

artificial intelligence, cloud computing, the data management. Obviously, our cyberspace is huge, so we have the resources and I think the intellectual horsepower to be at the forefront of a lot of the new technology development, but not all of it we want to do in house. So we're actively looking to partner with larger and small companies, whether it's in software development, in data management in particular, and you know, embrace it. So it's it's very much a part of

everything we do. Digital currencies as well. Uh, yeah, we're helping clients hedge and manage their exposures to digital currencies. We haven't been, um, you know, we haven't set up a digital business unit focused on you know, the various forms of cryptos. Per see much more interested in the blockchain technology. I don't know what. It's just another form of stored value to me, and I'm you know, people maybe I'm dead wrong about this. Have been quite conservative

on this for a long time. UM, I see much more value around the blockchain technology supporting the currency in the currency itself. You mentioned sort of various partnerships, especially on the fintech side. From a competitive standpoint, where do you see the most competition across your line of business at this point? Um? Well, in wealth management clearly, you know the online space, but but that's not new. I mean schwab and E Trade and Merrige Trade being around

an awfully long time. They have been doing online you know, digital business. It was just called something different, which was direct brokerage, right, had a different name. Uh So that's

always been competitive, I think. UM. In the asset management space, obviously the challenge of a lot of the package e T F indexing versus the traditional long earning active managed, but a lot of our businesses are very complex, required global capability, you know, hedging, uh, you know a currency exposure in Japan, being long, certain rate securities in Australia. I mean we're twenty four hours. It's a lot of

it is UM. It's it's not that it's not challenge competitively, but most of our challenge comes from our traditional competitors, the big banks. James, I'm always curious, you know, we spend our time so much talking about FED policy, yield curves. He was trying to tread policy. What is it that you folks that Morgan are spending so much time having conversations about? What is it that we're not talking about

that really deserve a little bit more attention. Leadership culture UM creating an organization where diverse employees don't feel included, but feel not just included, but feel they belong. That's something I've felt very strongly about the whole diversity inclusion discussion in place. Somebody invited you into the room, Now

I want you to belong. It's your room. So we talk about a lot of the qualities that get at h Do employees respect your institution, want to be part of your institution want to make their careers and lives there that the macro stuff it blows right, I mean, okay, rates for two and a half percent. Now the one a half percent is Morgan's any fundamentally engine strategy because

of that, of course not. But if we can't attract really talented, committed people who do things the right way you have the right vegas, then then we're going nowhere. So I'm very Once your strategy is in place, and I think we have a really sound strategy, it's all about reaffirming the cultural values and putting the leadership in place for the next ten and fifteen years who can

drive those dues. Are we're making in roads. I want to ask about diversity because I feel like we've been talking about diversity parody women, you know, issues on Wall Street for a long long time, and we're still struggling and we will be talking about it for a long long time. I share one fact with you, uh this year,

and this wasn't by design. That was an outcome this year, For the first time ever, more than fifty of our intern class, which is a thousand interns globally, we're women first time ever, ahead of China, as a woman, Head of Europe, Middle East Africa as a woman, co head of Investment banking as a woman, the head of our bank as a woman. I mean, we have senior leadership women in multiple roles, but are they representative of the

role of women in society? No, they're not. Right. So we've we've we've we've made steps, but it starts with the pipeline at the beginning, and then finding ways in which you can keep those folks through all the transitions we make in life. Have uh terrific careers of Morgan Stanleys. Are those discussions and those efforts becoming easier or harder? Given the political climate we're in. We live in a pretty I think it's fair to say divisive time, hyper

political time in a lot of ways. How do you cut through all that to make these sorts of decisions? I think from a diversity perspective, No, I think from what is the role of the corporation society? Yes, I think we have been called as CEOs into the public debate much more. We're our our employees want us to express opinions on a wide range of issues, and it's very difficult because you've got to you you know, we all have personally. I mean, I'm I'm a voter, right,

I'm a citizen. I have opinions on all these issues. And it can't be just what James Gorman thinks. I'm not the company, It's what what is for the greater good of the whole organization. And I think what a lot of companies are now struggling with is what is our role in society? And this is why the statement came out recently from the CEOs at the roundtable, which was basically, too embrace the broadest stakeholders that we have. You can listen, you can be a bank and runner

only for shareholder value. But if society turns against you and nationalize as your bank, that didn't work out so well. Right. So I've always believed you have to operate in the

ecosystem with respect for everybody in that ecosystem. But what's interesting is, and we had a very smart conversation with um like we're having right now, but with another individual in the financial community, but talking about no, not everybody has the same access to education, you know, and I do wonder you know what that has done in terms of creating the gaps within our society. So how do we deal with that? Well? There, I mean, there are gaps in in in every society and not everybody starts

off with the same axis. I mean it's you know, you're like I was lucky. I was born in Melbourne to the family I was born with and given the education I was given. That's why I'm here. UM. So you know, there's no all of us know, there's no magic one. There are inequalities, UM, but they feel deeper than ever before. I think the gap between the most successful uh and the least is wider. And I think the minimum wage pressure for the last thirty years has

been devastating for a lot of people. I think there are a hell of a lot of people in this country and around the world who have not participated in the economic expansion of the last three decades, which is why the rise of populism has happened. On the other end, nationalism has happened, anti globalization has happened, anti immigration has happened. It must be somebody's fault if I didn't get ahead.

Who's that somebody? And at the end of the day, what a lot of people have decided that somebody is the politicians, which is why Brexit has happened and so on. So you know, I think that was a pretty good warning shot to the power elite so called in the world that you can't leave behind large parts of society and expect that to not have ramifications. Do you expect that that's going to change anytime soon or the power elite listening? I think this, I think that, Yeah, I

think there's a pendulum swinging. Um, and I think I think there is. I think there's some pretty healthy discussions. And back to the CEO round table. You know, two hundred or so of the top CEOs in the country all signed us and it was you know, this wasn't controversial. This is something we feel and we wanted to express to everybody out there working for our companies or or

participating with them. Last words, Yeah, I'm just thinking, you know, the next batch of nbas and students, what would be your advice, Uh, focus on the job you're paid to do. A lot of young folks coming to companies like ours, and they're trying to focus on the next job all the time, trying to figure out how to get ahead. You get ahead by doing what you paid to do

really well. Right. You do that, you succeed. That was James Gorman, Morgan Stanley Chairman and CEO, and of course Columbia Business School alumnus, because we spent a day up at the Business School, and it is funny you get somebody in that situation. You know, it's a different conversation that I think we would have if we trooped on over to his office. We had him here in our studio. You know, we're sitting outside. We've got college walk behind us,

all around us. He's literally just had a brown bag lunch with a bunch of students, so he was in a different mindset, but clearly a very thoughtful guy across the global markets. You've been listening to Bloomberg Business Week Extra, be sure to tune into Bloomberg Business Week Radio Live Monday through Friday at two pm Wall Street Time on Bloomberg Radio. I'm Jason mckellis and I'm Charle Masser. This bloom