Morgan Stanley CEO James Gorman on The David Rubenstein Show

What was it like when you came here to people make crocodile Dundee jokes? People would say to me, is it true all Australians wrestle crocodiles? I say, well not all of them. Wall Street CEOs are thought to be people that throw things at the walls and scream and yell. I think if you're the seventh of 12 children, you don't want to be the thrower. Are you in favor of repealing Dodd-Frank? That's a terrifying thought actually to start again, because what's going to replace it? The world doesn't want the large banks to be unregulated. You've been the CEO seven years or so. It's pretty long. What are you telling me, David? Would you fix your tie, please? Well, people wouldn't recognize me if my tie was fixed. Just leave it this way. All right. I don't consider myself a journalist. Nobody else would consider myself a journalist. I began to take on the life of being an interviewer, even though I have a day job running a private equity firm. How do you define leadership? What is it that makes somebody tick? James, thank you very much for doing this. Honored to be here, David. Now, you have an accent compared to me. Maybe in Australia, you don't have an accent, but you have an Australian accent. I assume that's because you grew up in Australia. It is, and it's also a measure of me being tone deaf, but after 30 years, haven't been able to get rid of it. So I am an only child, so I don't know what it's like to be in a big family, but you were in a family of 11 children? We had 12 originally. 12 children. So what was that like? Two passed away, so we have 10. It was actually very noisy. You, I think, learnt a great deal of empathy for others because you're in an environment where something was going bad every day in our household, and something was going good. What part of Australia were you growing up in? Melbourne. So when your parents are producing new children regularly, did you ever ask them what was going on? Hadn't quite thought about it in that language. We didn't think of it as a production line. We more thought of, here's Nicholas. Isn't that great? Your father had a job where he could afford all those kids easily? No, he was actually an engineer working for a large corporation, and ironically, he counseled me my whole life, never worked for big business. You need to be independent, control your own firm, as he called it. He was an engineer, and he set up his own practice when he had seven children at the age of 37 with no income. Obviously, he was successful. He was not particularly financially motivated. He was very intellectually curious. To him, education, reading, ideas, debate were the essence of what our family functioned as. So you live here now, but you go back and see your siblings, and what do they think now that you're a famous person in the United States? Do they look on awe of you, or they don't treat you any differently than they did when you were growing up? You mustn't know my siblings very well, or Australians, for that matter. There's actually a cultural phenomena in Australia, which I think is a truism. It's called the tall poppy syndrome, and in any field of poppies, there's always one or two flowers that grow above them, and they disrupt the beauty of the field, and you chop them off to keep that. In Australia, they equate the tall poppy syndrome is that if you're extremely successful, you have a higher burden to be more modest and to give back more. There's sort of a reverse psychology. My family is great. I'm very close to my siblings. We always get together for dinner when I'm down there, and I have a terrific time. They've all been, I guess, successful in lots of different ways. One was a stand-up comic for a while. One has been one of the top judges down there. They've all done different things and had fulfilling lives, so no, there's no or. I can assure you of that. James, your turn to get the barbecue going. You were educated as a lawyer in Australia, so you could have practiced law, I assume, there, but you chose to come to business school in the United States. Why did you choose to not practice law and come all the way to the United States, and did you intend to stay here, or do you think you were going to go back? I practiced law for four years, actually, and I was not very good at it. My two elder sisters were both lawyers and were both terrific. I was more interested in being where the decisions are being made. Lawyers, their job is to create the structure in which decisions can operate and can be processed well, to clean up after there have been problems, to document and help the negotiation of things, but they're not at the decision point. For my career, I've always tried to get closer and closer to being the person or part of a team that's making decisions. Everybody has different things which excite them. You're practicing law. Presumably, you're making some money, but you gave it up to come to business school in New York at Columbia? At Columbia, yeah. So what was it like when you came here? Did people make crocodile Dundee jokes about Australia, or they didn't do that? They did, actually. I was very lucky because I have a very ugly scar on my arm from when I played football, which I wasn't very good at, but I got a major scar from it, so I can pretend to be good. People would say to me, is it true all Australians wrestle crocodiles? I'd say, well, not all of them. That, of course, leads to the question, well, did you ever wrestle a crocodile? Well, of course. That's what we do, and I show them my scars. I came to the States because, seriously, there was an advertisement at the time, which I think I saw growing up in Australia, but maybe I saw it in the US, which essentially said, if you can make it here, you can make it anywhere. The concept that this was a land that if you came to, you worked really hard. I borrowed 24% interest to come here, paid for all my student loans. You worked really hard, and you could be successful here. There was a path forward, and I was fortunate to get the student visas, and then a green card, and ultimately citizenship, which I took 12 years ago. I felt that the welcoming nature of the US economy, and the people, and willingness to accept people who are prepared to have a go here, I thought was just wonderful. You graduated from business school, and then you went to work for McKinsey. Is that right? So you wanted to be a consultant, or at least you joined a consulting firm. What was that like? It was great. It was one step closer to where business decisions get done. You're working with management teams. You're helping companies figure out their strategy. You're helping improve their operations. It was like going to business school for real every day. It was fantastic, and you got paid to do it. I couldn't believe my good luck. So you then went after a few years. You were recruited by one of your clients. Was that Merrill? Sounds like I couldn't keep a job here. This is not going so well. Well, they recruited you. Merrill Lynch. Did Merrill Lynch recruit you? Dave Kamansky. All right. So Dave Kamansky said you were so good as a consultant, come in and actually do the job here. And what was your job at Merrill Lynch? First job was to run marketing. And then it was to run the sales organization for the brokerage business. You were doing that, and then somebody calls you from Morgan Stanley and says, well, you're doing a great job at Merrill Lynch. Why don't you do even a better job and come over here? Is that how it happened? Well, they had a business that they needed fixing, and I had some expertise in that business. It actually was a very struggling business at the time. It was the old wealth management business. John Mack called me when he got recruited back to Morgan Stanley in 2005, I think, and asked me to be part of the team, which I thought it was a very exciting challenge. So I did that. So when you came over to run the wealth management business, did you ever think you'd be the CEO of something like Morgan Stanley? I did not. I told John, actually, when he was interviewing me for the job, I said, you know, we can fix this business. I'm pretty confident about that. I knew a lot of people in the market. Immodestly, I understood what the issues were, and I felt we could fix it. But I said, we'll only fix it to a certain level, and then you'll have a very important decision to make, and that's probably two years from now. That decision is, do you double the business? Because this is a business that has scale economics, and you need to double it, or sell it to somebody else who's going to double theirs. There was an inevitability about this outcome, and I said, at that point, I'll leave. I didn't have any anticipation of being there longer than two years. You didn't think you would go back to Australia? No, but I also didn't think we'd have a financial crisis. Australians seem like they're relatively even-keeled, and consultants are relatively even-keeled. So you seem to be, from my knowledge of you, a relatively even-keeled guy. But Wall Street CEOs are thought to be people that throw things at the walls and scream and yell and slam phones down. So is that image wrong, or you just have succeeded even though you're relatively low-key, or do you actually throw things as well? I mean, you seem very modest and controlled in your personality. Aren't you used to CEOs that are throwing things? Well, I think if you're the seventh of 12 children, you don't want to be the thrower. That's not going to end so well. No, I think part of it is honestly just personality, and that probably helps shape you. Your personal family obviously does. But I think these businesses have been on a 30-year transition from very tightly held private partnerships, where frankly more extreme personal behavior, taking more risk because it's your own money, et cetera, et cetera, where it's par for the course, versus now, these are big global corporations. We're relatively small among the big banks here. We've got a $2 trillion of clients' assets. We have a trillion-dollar balance sheet. We have 55,000 employees. We're all over the world. These are major global corporations. They've got to behave and act like major global corporations. I don't see a Jeff Immelt, a Ginni Romney, or any of those executives behaving the way maybe the historical caricature of a Wall Street would have. Are you in favor of repealing Dodd-Frank? That's a terrifying thought, actually, to start again, because what's going to replace it? The world doesn't want the large banks to be unregulated. The world for people who are running Wall Street firms seems to be pretty good, in the sense that Wall Street profits are high, or therefore are expectations so high that things are inevitably going to go down. If you believe that the U.S. economy has turned, which I do, and the Federal Reserve apparently concurs, and if you believe that we're destined for economic growth more like 3% than 1.5%, particularly with unemployment where it is, and if you believe that some of the policies the new administration is talking about on the economic front come through, with little trade disruption, then it's not a total surprise the markets reflect that. You're the CEO of one of the best-known Wall Street firms in the country, in the world. So why do you think the image of Wall Street firms is not so great in the country? Well, first, I'd just say, coming to this room, I got a round of applause, which I appreciate, because I would go anywhere for a round of applause these days. The facts are that, absent the Great Depression, the Great Recession that we all went through, Wall Street had a large part to do with, if not the major part to do with. And a lot of the synthetic-type products that were created that gave rise to putting a level of risk into the financial system that turned out to be systemic risk that led to massive failures of institutions, which led to the taxpayers having to bail out the remaining institutions. It's not surprising that the public and the taxpayer would have such a negative reaction to those who caused this to happen. Now it's seven, eight years later. Why is the image not better? It's hard to love money unless you have it. Being attracted to Wall Street as a concept is not something most people just naturally gravitate to. Folks gravitate to new technologies. They gravitate to consumer services that obviously palpably make their lives better. They gravitate towards entertainment. You gravitate towards the things that you can viscerally feel and touch. The flow of capital is not one of those things. So in many folks' mind, it gets back to where has it caused problems? And what we haven't done as good a job of, as I said, is really articulating why capital is what takes these incredibly innovative little companies that once were as they once were, like a Facebook, like an Apple, like a Google, and creates capital to let them grow and become these incredible success stories. Are you in favor, as some people in the Wall Street community seem to be, of repealing Dodd-Frank? Are you actually tolerating it and you can live with it? Oh, I would not repeal it. I think that would be a mistake. We have redesigned the way in which large financial institutions in this country function. How they're capitalized, the liquidity they hold, the leverage they operate under, the way that they're managed, the way that they're overseen by the Federal Reserve and the other agencies, and what happens to them if they get into trouble. That has been a multi-year process. Certain elements have definitely gone too far, but the essence of that structure, I think, has been absolutely critical, and that is the reason the US financial system is so much better shaped than almost anywhere in the world. Now, are there pieces of Dodd-Frank that I clearly feel went too far, have unintended consequences, are disruptive to market liquidity? There's no question about that. But I would not start again. That's a terrifying thought, actually, to start again, because what's going to replace it? The world doesn't want the large banks to be unregulated. Did you know Donald Trump before he was president of the United States? I think I've met him once and I spoke to him about a transaction one time, so very little contact. You never turned him down for a deal, I assume? I did not, personally, no. And have you seen him since he's been president? No, I have not. And do you have any advice you'd like to give to him about what he should do, or you would say he's doing enough right now, he doesn't need any advice from you? He's got a pretty large team of advisors and a lot more people who want to be advisors, so I don't think the shortage of advice is the problem. I think, somebody once said to me, the office of the president of the United States consumes people. They've got a very bold agenda, but at the same time, the world is not staying static. We have enormous geopolitical uncertainty. You have issues around North Korea right now, Iran, the immigration crisis in Syria. There are a lot of pockets of the world that could easily engulf and consume the time of the president. I think it's critical that they be very focused on a small number of achievable goals and that the team is very coordinated, deliberate, and cooperative in working to get those done. Now, the strategy that you have employed as CEO, and since you've been CEO, I think the market capitalization is up about 110%, so I hope you get a good bonus for that. Thank you. But your strategy has been to kind of de-risk the firm a bit and to go into wealth management a little bit more than was before. What was the reasoning behind that strategy? The analogy I used is an aircraft carrier. The wealth management business is incredibly stable. In really bad markets, it might be down in revenues 10%. Now, in really good markets, it might be up in revenues 15%. The day the wealth management business blows through the roof is the day you should be scared. You want it stable. We got the ballast from that with the speed in the engine room from all the capital markets businesses. I thought, and the board thought, and John Mack also was part of this, obviously, that mix was an incredibly powerful thing to present to investors and to clients. If I want to have my money managed by, let's say, Morgan Stanley, what kind of rate of return should I get? Let's say I give you X dollars. What should I tell your money management people that I want and be reasonably happy to get? It depends who you are. If you're David Rubenstein and you've got a lot of your money tied up in Carlyle and in all your funds, very illiquid, very long-term trap that you don't want to take out, then you're probably going to be very conservative with that which you put into the markets. I would think prudently. You're not buying the hottest stock. That's not what you do. You've got your risk already in your business. If you've got $35,000 to invest, I would say you should buy an S&P index fund and sit on it and never look at it again and wait until you actually need it for your retirement. Who manages your money? I have a wonderful financial advisor. At Morgan Stanley? At Morgan Stanley. And she does a terrific job. So does she call you up and is she worried that if she doesn't do a good job for you, she might lose her job? Does she worry about that? She's a professional. She treats me like all of her, hopefully like all of her clients. I probably get a little bit of extra care and attention, I suspect. But they're a professional team. They do what they should do. They do a quarterly report. We sit down with my wife every year, do an annual review of our total financial situation, and we adjust it accordingly. You told me a story recently that you went out to pick up some pizza. When you're the CEO of Morgan Stanley, can't you get somebody to deliver the pizza to you? I don't regard the CEO thing as defining you as a person. You have to be able to, once you're not CEO, for that not to materially affect how you are as a person. What's the greatest pleasure of being the CEO of Morgan Stanley? Do you, when you go to a restaurant, do you get people to give you your seat right away? Do you have people give you tickets to all the events you want to go to? You get tickets to Hamilton easily? I saw Hamilton recently for the first time, and wow, that was just... But do you have trouble getting tickets? I assume not. Of course, of course, no. No, the greatest pleasure for me is, and this is going to sound hokey, but it's true, our firm has been around for a little over 80 years. For about 65 to 70 years, we had very few issues. I mean, you had your normal sort of growth pains, if you will, and then we had a period of about a decade where we tried to become a firm we weren't, which was doing a lot of prop trading, participating in markets just for our benefit. There was no obvious client on the other side of it. A lot of firms do that. Hedge funds do that, obviously. A lot of firms do that, but that wasn't what was our core DNA. And what we've done in the last few years is try and restore Morgan Stanley back to its core DNA, which is all about serving our clients. So today, how do you spend your time? How much, what percentage of your time do you spend meeting clients, prospective clients? Is that 10%, 15%? No, it's more, and it changes. You know, I think each year, I don't think each year I sit down and write the 10 things that I want to get done that year. And in the early years in the job, there were very much problem issues. We owned a half-built, I don't know if you remember, but we owned a half-built casino in Atlantic City. We wrote that off. A lot of things that needed to get resolved. Happily, as time has gone on, they're resolved, and I'm spending much, much more time on client activity. A much larger part of the job now is trying to help our teams do what we're supposed to do, why we come to work every day, help our clients. What about employees? How much time do you spend rallying the troops? As much as the impact tonight, we have our new managing director dinner, which we have all of our 142 new managing directors this year, and their spouses and partners, and I'll be speaking to them right after this. So I try every day to try and do something that connects to a group of employees, whether it's summer interns or senior managing directors. And you travel roughly what percent of your time? I don't know, probably about a third. Now, you've been the CEO since 2010, so in the lifespan of Wall Street CEOs, seven years or so is pretty long. What are you telling me, David? Well, but you're a young person, so when you eventually decide that you might want to do something else, have you ever thought about what you might want to do? I think we all have fantasies of what we'd like to do, and then reality steps in and says, actually, what are you any good at? And I think you've got to be, it's fun to dream, but you've got to be true to what your real skills are. And I'd certainly like to teach, and I'd like to spend more time. I was more involved philanthropically than I have been the last several years because I just haven't had the time, more time doing that, but probably teaching, investing, learn at the feet of the great like David here. But it's a big world, there's a lot to do. I want to spend more time in Australia. So you were very low key by Wall Street standards, I think. And so you told me a story recently that you came back the other day and you went out to pick up some pizza. Now, when you're the CEO of Morgan Stanley, can't you get somebody to deliver the pizza to you? Or why come you have to go pick it up yourself? No, I don't regard the CEO thing as defining you as a person. I think everybody is different, but you have to be able to, once you're not CEO, for that not to materially affect how you are as a person. And a lot of people it does. I've seen it over many years, not everybody. Our life is very simple. We keep a very balanced sort of down home kind of life. I mean, obviously we live well, but you can't define, the job shouldn't define you. Your job is, you're CEO for a point in time, you're helping drive the vessel, and you'll get off it, and hopefully it does better after you're gone. Looking at the world today, if you were starting your career all over again, would you go into finance, knowing what you now know? Yep, when I was at law school, I had three jobs. It's a true story. And one of them was, I worked in a sheet metal factory, melding sheet metal together, which is incredibly difficult. The second was, I was the toilet cleaner at my college, which was an all-male college, which was incredibly difficult job. And the third was, working on Saturdays at the local brokerage firm called Potter Partners, which is now owned by a global firm, helping match trades that had not been matched during the week, sort of loose end trades. And I love the business then. The first shares I bought were oil exploration options, which is about as far on the risk, but I was, you know. Did you make money on it? Yeah, but I was 19 years old. Why not take some risks, right? There's, you have no responsibility. I love the business. I love the markets. I love the business. And I love working with CEOs and clients and trying to get good financial transactions done. Now you have children. Are they in the financial markets? No, no, they're not. One is working in DC in a consulting business and one is still in college and she's an artist and musician, very creative. So when you became the CEO of Morgan Stanley, did they treat you differently? They have more respect than before or no? Not really, no. No, you know, we're very grounded. The kids, the kids are great. And I spent a lot of time with them going through the SAT tests and visiting colleges and all that sort of stuff. And no, I think, you know, they're, you know, first and foremost, you're your dad and you want to be as normal a dad as you can. And hopefully some of the trappings of office and the stuff around it, you've got to keep that away from your family. Your family is your family. So they don't say my dad is the CEO of Morgan Stanley? They don't tell people that? I don't think so. No, they're, you know, they're trying to build their own lives. And, you know, like all of us, we want our kids to have the right level of independence, but know that you're there to support and love them whatever happens.