A Conversation with the Chairman of Morgan Stanley
NOV . 30 2015
Ever wondered how the first bank was created? James Gorman, Chairman and CEO of Morgan Stanley, started with an interesting anecdote on how banks came into being and how they were named.
“Venice”, Gorman said, “is generally where people agreed that the first bank occurred. Merchants on one side of Venice supplied, with several activities like sales as they foraged. And the money lenders lived on the other side of Venice. So the money lenders and borrowers met across the waters, on the top of the canal, where they sat on a bench and negotiated the terms for borrowing.” The first form of a bank functioned as a channel of bringing borrowers and lenders of capital together. “Actually,” Gorman added, “the word ‘Bank’ originated from ‘Banco’ (‘bench’ in Italian).”
In plain terms, banks provide fuel for the economy, allowing people to borrow and leverage capital in order to grow their businesses, without which markets would be very inefficient. While this is generally true for banks, what differs investment banks like Morgan Stanley from commercial banks? “Commercial banks lend money directly using deposits, whereas investment banks finance through capital markets.” Gorman explained. At their core, investment and commercial banks form the same function, only one is market-driven and one is balance-sheet driven.
Morgan Stanley in a New Regulated Market
With the aftermath of 2008 financial crisis still looms in several markets in the form of slow growth and disinflation, conservative regulators have imposed tight regulations on financial industries. Gorman made an interesting analogy here: Regulators work like doctors. Firstly, regulators provide the do’s and don’ts for maintaining the health of banks—which means to preserve enough capital, ensure liquidity, and to keep leverage under control. Second, regulations serve as a sort of annual checkup, in the sense that regulators monitor the financial health attributes of banks to see if they are actually working at times of stress. Lastly, ‘Recovery and Resolution’ plans, which have been administered to avoid another Lehman-type collapse, are meant to ensure that in the unfortunate event that one is dying, one dies peacefully. Never before the crisis had we had such a pre-crisis constructed framework.
Too-big-to-fail or Just too Big?
Prior to the 2008 financial crisis, Morgan Stanley had a balance sheet of 30 billion dollars, with a leverage of 40 times, but with the new regulations, Morgan has chosen to downsize its leverage to around 11-12.
“When your balance sheet is as big as Morgan Stanley’s—we had an 800 billion balance sheet, some even significantly higher—you’re causing great waves of problems to the economy if something goes wrong.” Gorman defined this as being something that was “systematically important”.
Even with stricter regulations, Gorman is unsure whether the “Too-big-to-fail” problem has been completely solved, though the regulations have caused drastic changes in financial institutions. The changes, he suggests, are more in natures of complexity of financial institutions, rather than in their size, stating that “Institutions should demonstrate that they can handle extra capital level or else they should be smaller.”
Gorman admits that though new regulations have brought along constraints, but Morgan Stanley recognizes the necessity for a set of rules and worked within the regulations by making the necessary adjustments, even if it means making concessions and sacrifices. Were the regulations passed overly-restrictive? Had the regulators been overreacting? Gorman was not surprised by the heavy supervision, feeling that the unprecedented magnitude and long-lasting effects of the 2008 financial crisis should be accepted. In Gorman’s words: “[There were] A lot of responsible parties in the crisis, banks were just the easiest to find.”
Rule Number 1 for Being a Leader: Do not get Paralyzed by Doubters.
Gorman assumed his position at a critical time not only for Morgan Stanley, but also for the entire market as a whole. In taking on aggressive and reformative changes for Morgan Stanley after the crisis, what were Gorman’s core strengths? Gorman took on aggressive and reformative changes for Morgan Stanley after the crisis. This lead to a question of what were his core strengths in making those decisions and whether there were those who challenged his decisions.
“Being in a leadership role means that you have to want to make decisions.” By that meaning, when making a decision, one must bear the consequences that come with it. No matter who you are, as soon as you make a decision, there will be oppositions and people who just don’t like it. There are times when they turn out right, and you're wrong in the end. This paralyzes a lot of people. “I like being the decision maker,” Gorman says with a smile, “and I don’t mean it in an arrogant way. I get input from a lot of people but I’m very comfortable making decisions and living with the consequences.” Gorman understands that even the most intellectual and well-informed make wrong decisions, “but if you're always waiting for perfection, you never decide.” This is crucial because organizations are led by decision-making, “You have to be right most of the time, or you’re not the right leader.”
Though Morgan Stanley received help from the government during its recovery stage, it was not an easy job. The help was contingent on several things happening, one was convincing shareholders to buy into this—a sector that has become nearly un-investable. Gorman recalls talking to shareholders, explaining and reassuring them that a crisis like this would not happen again to Morgan Stanley. Gorman believes that the right values and culture starts at the firm level, “You cannot regulate ethics. It is embodied in your culture,” and Gorman’s job was to reaffirm thoe values. “You need a healthy ego to pursue your work, and regulations check that you’ve made the necessary precautions and you’re not being over excessive.” The impression of consistency and credibility that people had for Morgan Stanley, together with cooperation with the key regulators, has brought Morgan Stanley to such a position today since the 2008 crisis.
“I Love Making Decisions”
In response to a few career path related questions, Gorman drew upon some interesting personal stories. Gorman grew up in Australia and became a lawyer. Making his family one that had 7 lawyers, Gorman felt that he had to get out of there. “I wanted to be in business because it was all about decision making.” Gorman felt that lawyers worked after consensus were made, which could never fulfil his appetite for making decisions himself. With that, he left law and went to work for McKinsey for 12 years. Though being closer to actions, Gorman still felt that he wanted to be at the core of the decision making, which lead him to pursue a business degree at the Columbia Business School in 1985. “You can’t plan this too much. Life is a journey, you can’t be too prescriptive and should instead, pursue things you love. Interests grow into passions. Be open.”
When asked if he had a mentor in life, Gorman said he cannot think of a single person as his mentor. Instead, he finds elements of people that he admires, and rather than copying them, he talks and learns from them.
“Always have a targeted question. ‘Gee, I noticed that you are good at such and such. I’d love to have coffee with you sometime and talk about it. Rather than just saying, ‘Hey, you’re talented. Give me some of your stuff.’” When Gorman first arrived at Merrill Lynch’s marketing department in 1999, he came across the “Capone of American Express”, the one who led the best campaign in history. Gorman remembers he walked up to him and asked ‘Can I talk with you? I’d love to hear about the campaign, what did you think about…? I had specific questions.”
But speaking of a single person who is as much as a role model as a mentor was his father. Gorman’ father grew up in Australia, where he was home-schooled. Though he was sent back to his property without a choice because of a drought during his college years. He was the valedictorian of his class. Gorman’s father became an engineer and started his own business with 7 kids at home. His view on life was that even little victories should be celebrated, rather than obsessing over big magical moments or turning points in life.
Many in the audience expressed interest in working at investment banks like Morgan Stanley, but were concerned that not coming from a financial background would be detrimental for them to pursue careers in this field. Gorman assured that their employers were talented people that came from a wide range of backgrounds and that there are departments that require in-depth knowledge, such as in the liquidity and risk management group.
“There are jobs that deal more with relationships, like sales, and there are the more technical ones. But still, you have to be numeric and analytical, of course. That’s the threshold.” No matter your department, communication is at the core, and being able to communicate ideas clearly and powerfully is not unique to financial people. Simplifying complexity and telling a story is the key to communication. When Gorman tells people about Morgan Stanley, he does not talk about how big a bank doing big transactions of billions and trillions. Instead, he tells a story about an aircraft carrier with departments like wealth and asset management that brings stability in volatile times and investment divisions that work as powerful engines that gives speed in good times. “So it’s about stability and speed,” Gorman concluded. Simplicity creates stability, and “people cannot follow complexity”.
The hour passed quickly and Gorman concluded the panel with some opinions on the Chinese economy.” There are people saying that China is losing steam and its growth is slumping. But it is still 2.5-3 times the growth speed of the U.S., and it should be taken seriously.” Its growth, pollution, food quality, the one-child policy, and workforce problems should also be evaluated. “I’m not bullish on China, but I’m definitely positive.” He stated that big operations are happening in the Asia Pacific region, and that he sees no diminishing in investing in these regions.
Written by Zheng Zihui
Source: PKU Newsletter (Winter 2015)