Financial markets will “take off” once investors are confident the Federal Reserve has completed raising interest rates, outgoing Morgan Stanley CEO James Gorman predicted, offering an optimistic outlook for his successor.
In a wide-ranging interview with the Financial Times a few days before handing over the CEO job to Morgan Stanley co-president Ted Pick, Gorman also said that during his 14-year tenure, the banking system had become much safer and “their own “Stupidity” is one of the biggest threats banks still face.
Financial markets and parts of Morgan Stanley's investment banking business have struggled to adjust to the Fed's aggressive campaign to curb inflation, and investors are now digesting mixed messages from central bank officials about when interest rate cuts will begin.
“The shock of the recent interest rate hike has put a damper on banking operations [and] Capital market transactions. And this is [because] “Everyone doesn’t really know what the cost of financing is,” Gorman told the Financial Times.
“The moment the Federal Reserve concretely signals that it has stopped raising interest rates, let alone the moment it cuts rates for the first time, these markets will take off. And we’re right in the middle of it all.”
Gorman, 65, will step down as CEO on Jan. 1 and hand over the reins to Pick.
“I don’t want to be CEO anymore. I loved it. I loved everything. I’ve been doing this for 14 years, that’s enough,” he said.
The other two candidates for the top job – Andy Saperstein and Dan Simkowitz – will remain in office as co-presidents. Gorman will also serve as chairman during Pick's first year on the job, completing an unusually smooth leadership transition for Wall Street.
The handover from James Gorman to Ted Pick (right) is considered an unusually smooth succession on Wall Street © Bloomberg“You can tell that Morgan Stanley is run by a management consultant and Goldman Sachs is run by traders and bankers,” said one Goldman banker, drawing a contrast to the power struggle between David Solomon and Harvey Schwartz in the race to succeed Goldman in 2018 here.
The smooth process has branded Gorman as something of a successor expert. He is expected to join Walt Disney's board next year, where he will sit on a special succession planning committee. Disney's directors and CEO Bob Iger have been criticized by investors and governance experts for poor succession planning. Iger returned to the helm of the company in 2022 after his hand-picked successor had been in office for less than three years.
“It is not the specific reason why I am joining their board, and it is up to the CEO and chairman of Disney how I work in these processes,” Gorman said. “[Succession] is something that is very close to my heart. I think about our talent management here over decades.”
Gorman, an Australian described by colleagues as an introvert, was not a natural candidate for one of Wall Street's biggest jobs. After becoming a senior partner at McKinsey and a stint at Merrill Lynch, he moved to Morgan Stanley in 2006 and succeeded John Mack as CEO just four years later.
Gorman has grown into the role, speaking more confidently about the Fed's work and recently casually telling investors that Morgan Stanley would eventually manage $20 trillion in assets, more than three times the amount it currently manages.
“The James Gorman we see now is not the James Gorman from first year,” said one person who has known him for years. “James is an introvert who has become very sophisticated.”
Morgan Stanley nearly collapsed during the 2008 financial crisis, and its future still seemed uncertain when Gorman took over the company in 2010. He diversified his business away from investment banking and trading, activities unpopular with investors due to their unpredictability, and increased his focus on wealth and asset management, which are considered more reliable businesses.
That push helped Morgan Stanley achieve a market capitalization that surpassed that of long-time rival Goldman Sachs, which is now also trying to grow in wealth and wealth management.
Gorman gave his time as CEO an A- grade, saying a higher grade would be immodest and that it would be “false modesty” to choose a lower grade.
“Objectively we did well. The stock has essentially tripled.”
Gorman suggested that new rules since the financial crisis, requiring banks to hold more capital and refrain from riskier activities, have made the system much safer, to the point that the biggest threats to banks are now operational factors such as cybersecurity , artificial intelligence and “stupidity” are of our own management”.
The high-profile failures of three regional U.S. banks this year – Silicon Valley Bank, Signature Bank and First Republic – were “entirely their own doing,” he said. He also cited Credit Suisse, which collapsed in March and was acquired by UBS, as an example of operational risk management gone wrong.
“It is no coincidence that it is the only institution in the system in the world [relevant] Credit Suisse was a banking institution that effectively failed – and they didn't really fail from a capital, balance sheet and liquidity perspective. They have failed from an operational risk and management perspective.”
Big European banks have struggled since the financial crisis, allowing U.S. rivals like Morgan Stanley to grow far larger, but Gorman said the coming years offer Europeans opportunities to close the gap.
“At one point in time, Credit Suisse, UBS, Barclays and Deutsche were each bigger than us. And now we’re about the same height as all of them combined, and for a while we were bigger,” Gorman said.
“I don't believe [over] In the next decade the gap will be just as large. I think there are opportunities for Europeans, but in the last decade it has definitely been a failure,” he added.
Looking forward, Gorman said he plans to spend more time teaching in his role as chairman of Columbia Business School, but “for once in my life I don't have a clear plan, that's a good thing.”
“It's a big world. “I didn’t spend my whole life trying to be the CEO of a bank,” he said. “So I’m not going to spend the rest of my life continuing to be the CEO of a bank.”