On November 19, 2015, as part of PKU’s Guanghua School of Management’s The Thought Leader Series, Morgan Stanley’s Chairman & CEO, James Gorman, sat down with Guanghua Prof. Li Jin, also the director of NCFR, to discuss the global economy, finance and leadership. The Dean Prof. Cai Hongbin gave the introductory remarks at the event which was attended by over 300 students from the management school, as well as by Wei Sun Christianson, Asia Pacific Co-CEO of Morgan Stanley, and her China management team.
Mr. Gorman sat down with Guanghua Prof. Li Jin for an insightful discussion on the global economy, finance and leadership. The agenda included three core areas:
1. Regulations & the Post-financial Crisis Landscape
2. China & the “New Normal”
3. Leadership & Decision-making
1: Regulation & the Post-Financial Crisis Landscape
New regulations have not only decreased the chance of failure for major financial institutions, but have also lessened the impact that a failure would have on the wider economy.
Q from Prof. Li Jin: The US regulatory environment has dramatically changed since the global financial crisis in 2008. How have the new regulations affected your business?
A from James Gorman:
“The regulatory changes are historic. If you just take Morgan Stanley, pre financial crisis we had US$30 billion of capital. Today, we have US$70 billion of capital. Pre- crisis, we had a balance sheet of US$1.25 trillion, which means we were levered nearly 40 times. Today, we have a balance sheet of US$800 billion, which means we are levered 11 to 12 times. The amount of liquidity we had pre crisis was about US$80 billion on a balance sheet of US$1.2 trillion, so six to seven percent. Today, our liquidity is over US$200 billion on US$800 billion, so it’s 25 percent.”
Regulators, James Gorman says, are like doctors and the regulations themselves are similar to a health assessment. The health assessment includes the prescription, the actual check-up and end of life arrangements.
The Prescription. In order to stay healthy, regulators, Mr. Gorman says, ask financial institutions to preserve enough capital, carry enough liquidity and keep leverage in control. Like eating an apple a day, this prescription keeps financial institutions in optimal health.
The Check-up. Regulators, led by the United States, perform what Mr. Gorman describes as an annual health check-up. This process ensures that the processes within the financial institution, or otherwise healthy attributes, are working in times of stress.
End of Life Arrangements. Mr. Gorman also pointed out that regulators have also implemented the Recovery and Resolution Plan, which eases the death of financial institutions and ensures that there is an “orderly liquidation of the body”. This is particularly important, because when institutions that are “systemically important” fail, they can cause significant damage to surrounding institutions.
Q from Prof. Li Jin: Do you believe “too big to fail” is still the case?
A from James Gorman:
“The issue is the complexity of institutions. I think it’s incumbent upon all large institutions to demonstrate to their regulators and their governments that they have a sufficient handle on the complexity of their businesses and, to the extent they don’t, they should get smaller.
I think “too big to fail” has effectively been solved by the extra capital levels and something recently implemented called TLAC, which stands for Total Loss Absorbing Capital. It’s basically to take various forms of debt securities and, in the times of crisis, work those into equity capital. The amount of TLAC combined with the amount of capital is getting up to twenty-five percent of balance sheets. So, could somebody theoretically fail beyond that? Yes, but it would be an extraordinarily situation… much worse than the financial crisis we went through.”
Q from Prof. Li Jin: We are aware you were elected to the board of directors of New York Fed. How do you achieve this?
A from James Gorman:
“If the organization doesn’t have the right values and the right culture, we would not be asked to play this role. Morgan Stanley has great DNA. As a CEO, part of my job is to re-affirm the cultural strengths that have been built for 80 years at Morgan Stanley. I see this appointment as a sign of respect for our institution and our culture.
We have a great team that really contributed to the relationship with our regulators – Ruth Porat who was our CFO through the last several years (now the CFO of Google), previous CFO Colm Kelleher, who helped us navigate through the financial crisis and now leads our securities business, is deeply respected, particularly by the international regulators, the current CFO John Pruzan and Keishi Hotsuki who runs our risk management function. Collectively as a team we have built credibility and stability. I just happened to be the person there at this point of time. If I were not the CEO and one of these others were, I am sure they would have been asked to be on the New York Fed Board too.
2: China’s Economy
Mr. Gorman is optimistic about China’s economy. China’s percentage of growth is slowing, but the total amount of growth is still extraordinary.
Q from Prof. Li Jin: In 2008, we experienced the global financial crisis and it was followed by the Eurozone bond crisis. Now, the emerging markets are falling apart and China faces an economic slowdown after over two decades fast growth. What is your view on China’s economic growth?
A from James Gorman:
“The market gets obsessed by percentages. Is China growing at six, seven, eight or ten percent? What’s more important is the dollar value of China’s growth. It is mathematically impossible for China to keep growing at the 10 to 14 percent it was growing at a decade ago. That was obvious. However, markets don’t always respond to the obvious. Markets are emotional and they get attracted to sound bites. The sound bite is that China’s growth is slowing. Well, as a percentage it’s slowing, but as a dollar value it’s not. Its contribution to global growth remains the highest contribution of any country in the world.
China has a GDP of US$10 trillion, the US is US$17 trillion and the next highest GDPs are at US$4 trillion, which is Japan, and Germany at US$3.5 trillion. If you don’t take China’s growth seriously, on the global scale, you clearly can’t do simple arithmetic.
China is actually an extraordinary economic animal and with that is coming a series of very serious transitional factors that are evidencing itself – from the pollution here in Beijing, to the food quality , to issues related to urbanization and job security, to demographics policies.”
Q from Prof. Li Jin: Are you concerned about China’s equity market volatility?
A from James Gorman:
“I think what happened this summer was not great to be perfectly honest. You can't hold yourself to having a market-driven economy and then intervene when things don’t go your way. That causes people who have other investment opportunities to say I am going to pick up and go home. Markets respond to consistency, certainty and the confidence that comes from that. I think the regulators and the government, from the conversations I’ve had, clearly understood that there were mistakes made. They understand that the nature of the intervention did not work out and actually destroyed confidence and accelerated the decline in the markets. There is a lesson to be learned from that.
That, however, does not distract me at all from the China market. The Chinese equity markets are very retail driven which means it can be emotional and immature. The Chinese economy is not retail driven, it’s not emotional, it’s a force of nature and it’s quite mature. I separate the two things.”
3: Leadership & Decision-making
A leader should be comfortable making decisions.
Q from Prof. Li Jin: In 2008, Bear Stearns collapsed, Lehman Brothers went bankrupt and Merrill Lynch was acquired. There were only two independent investment banks left on Wall Street. Many thought that Morgan Stanley would be the next to go. In fact, when you joined in 2010, the firm had had two years of negative earnings results.
You set a very distinctive strategy, restructured the business model and took very aggressive action to cut compensation, all of which led to the firm’s turnaround. This took great leadership and decision-making on your part. What is your philosophy on leadership?
A from James Gorman:
“If you want to be in a leadership role, you have to enjoy making decisions. You have to deal with the fact that no matter your role, as soon as you make a decision, somebody doesn’t like it. Further, some of the time, they’re going to be right and you’re going to be wrong. For some people, that is a paralyzing position.
I like being the decision maker. I like listening to others and I draw input from a lot of people before I make a decision. But I am comfortable making decisions and living with the consequences.
Organizations aren’t led by just rhetoric and charm; organizations are led by decision-making that points them in a direction. Most of the time you’ve got to be right, otherwise you are the wrong person to lead that organization.
Every institution faces doubt, particularly in a time of change, but if you get paralyzed by doubt, nothing happens. You have to be strong but you also have to be open to listen to others so you use strength with openness is the way to find a path forward.”
Students Q&A
Q from Cleopatra Wise: What advice would you give to young people on how to make career decisions?
A from James Gorman:
“Career is a journey... I think one of the worst pieces of advice that you can give people is to find your passion, because if you have a passion, you know it, you don't have to go and find it. Most people don't have a passion; they have interests. Those interests grow and they change. When I stop doing this job, my passion will not be to run a global financial institution.
Life is a journey and it takes you through all sorts of different paths and you should be open to where those paths take you.”
Q from Robin Tallendier: In the financial industry, do you believe an ethical business culture can only be achieved with strong regulations?
A from James Gorman:
“I don't think you can regulate your way to ethics. I think that ethics is something that is embedded in your culture and in your set of beliefs. Ultimately, if you join an organization, you're joining a shared set of values and that's really at the ethical center. If you share the values of a group of people, you don't try to hurt other people by taking excess risks yourself. So, regulations help guide how much capital you have, but they don't tell you the conduct. How to behave has to come from inside you.”
Q from Alex Zheng: What is your view on Internet financial services? Are they affecting your business or disrupting the market?
A from James Gorman:
“It is important that we embrace new technologies and at the same time, we provide enough intellectual capital, enough substance and enough capability where the technology becomes a tool rather than a decision driver.
Don't count the banks out. The banks have certain advantages: they have customers, they are regulated. So, if things go wrong, there is somebody who stands behind that. They also have insurance around their deposits. There are certain aspects of dealing with regulated institutions that are very comforting for the investor. However, certain products, such as getting a loan, where you are not giving the institution your money, but they're giving you money. That's most likely to go in the way of electronic delivery. Giving your money to an institution is an entirely different situation.”
