Riyadh, Asharq Al-Awsat- In an exclusive interview, Asharq al Awsat talks to Morgan Stanley Chairman and outgoing CEO John J. Mack.
[Asharq Al-Awsat] Your visit to Saudi coincides with the effects of the global crisis beginning to recede, and signs of recovery have started to appear. What is your view of global markets after the crisis?
[John J. Mack] The global financial crisis is largely over, but economic recovery and job growth in many of the world’s major economies will take longer to return. In developed countries, such as the US and Western Europe, I think we are going to see a very slow economic recovery. I am more optimistic about emerging markets, where I see more signs indicating stronger growth and a faster trajectory towards recovery.
[Asharq Al-Awsat] Do you think that the global financial crisis help to reveal the weakness of the global capital markets?
[John J. Mack] There is no question that the global financial crisis revealed weaknesses and flaws in a number of areas, including risk management by many major financial institutions, central bank monetary policy, gaps in regulatory oversight, and rapid and in some cases overly complex financial innovation. By revealing these deficiencies, the crisis has provided us with an opportunity to improve and strengthen the global financial system, and I support the coordinated efforts being made by governments and regulatory bodies to ensure that much needed changes are made.
[Asharq Al-Awsat] How has Morgan Stanley adjusted its strategy after the crisis?
[John J. Mack] Morgan Stanley has taken a number of steps to adjust our business strategy as a result of the crisis. We’ve made significant improvements to the quality of our balance sheet, improved our funding mix, cut our leverage in half (from over 30 to the mid-teens), and have made some longer term strategic decisions that will further diversify our business mix. The crisis provided us with a major opportunity to build critical scale in our global wealth management business through our joint venture with Citibank to form Morgan Stanley Smith Barney. This joint venture will over time give Morgan Stanley control of the largest domestic retail brokerage platform in the US, and its impact on our profile overall will be that our company will be more highly diversified, less capital intensive, and lower risk.
[Asharq Al-Awsat] What lies ahead for Morgan Stanley (post crisis)?
[John J. Mack] I think Morgan Stanley is in a fantastic position to benefit for an improving environment for capital raising, corporate activity, and investment. There is more capital sitting on the sidelines than I have ever seen in my 40 year career. Companies need to repair overextended balances sheets by raising capital, and stronger companies will increasingly look to make strategic moves. And investors, both institutional and individual, need to put money to work productively as their outlook changes from one completely focused on preservation of capital. As one of the survivors of this crisis, and as a bank that has been strengthened by it, we are in a position to benefit from those trends.
[Asharq Al-Awsat] Is Morgan Stanley participating in forming new legislation and regulation for the US banking system?
[John J. Mack] We are providing our views and taking part in the debate, both in the US and globally. I was in Istanbul over the weekend meeting with a number of our key regulators who were there for the IMF meetings. At Morgan Stanley, we are very supportive of efforts to improve the regulatory structure globally and ensure that this crisis is not repeated. I believe that we need an overall systemic risk management regulator to ensure a globally consistent regulatory framework. One of my biggest concerns is that we lose momentum on this issue and that the result is fragmented regulation that invites regulatory arbitrage.
[Asharq Al-Awsat] It seems that Morgan Stanley’s lines of business are so similar to those of Lehman Brothers, why did Morgan Stanley overcome the crisis and Lehman did not?
[John J. Mack] While Morgan Stanley and Lehman Brothers were both US investment banks, there were major differences in our business mix and funding profile, and the level of exposures we had to certain segments of the financial markets severely impacted by the crisis. Lehman Brothers was primarily a fixed income house, and not as geographically diversified as Morgan Stanley. While the financial crisis had a negative impact on all the investment banks, its impact was proportionately greater on Lehman, unfortunately.
[Asharq Al-Awsat] What is the effect of the Feds participation in Morgan Stanley?
[John J. Mack] Overall, it’s been very positive. We welcome having the Federal Reserve as our primary regulator and feel that their presence and oversight gives clients a higher level of confidence and comfort in the stability of our firm, although the move has had very little impact on our business on a day to day basis.
[Asharq Al-Awsat] There is a major debate regarding executive pay in banks that are receiving support from the FED, regarding placing caps on salaries. What effects will this have on the performance of the senior executives in the near future?
[John J. Mack] Morgan Stanley has repaid the government funds provided to us under the TARP program, removing us from the specific restrictions on executive pay that you are referring. But there is a more general and legitimate debate ongoing about compensation in our industry. At Morgan Stanley, we agree with the overriding principle that compensation should be aligned with sound risk management practices and with long term value creation, and should align employees’ interests with those our shareholders and with market stability. At our Firm, we have already made significant efforts to structure our compensation systems consistently with those principles. Our senior staff receive the bulk of our compensation in the form of stock, with lengthy vesting periods. In addition, we have introduced claw-back provisions to recover previously granted bonus awards if subsequent events demonstrate that the basis on which the employee was paid was not as sound as previously thought. We welcome further guidance from the bodies that are setting global standards on compensation issues and urge that whatever standards are set be applied consistently on a global basis.
[Asharq Al-Awsat] How do you assess Middle East markets – and particularly in Saudi?
[John J. Mack] The MENA region as a whole continues to be a key area of focus for Morgan Stanley. While markets in the region certainly didn’t escape unscathed from the turmoil of the past year, we are now starting to see some positive signs and the indications are that markets will continue to recover. We’re still very positive on the region – when we decided to build up our local presence in 2006, a key driver was the secular long term growth story in the region, and that hasn’t changed.
[Asharq Al-Awsat] Morgan Stanley executed the first Swap on the Saudi stock market, what is your view on this and do you see any progress on it under the current circumstances?
[John J. Mack] That transaction was an important milestone, being the first time that foreign investors were able to have access to companies listed on the Tadawul and naturally we were delighted to be involved. We think there will be continue to be growing interest from international investors in Saudi markets, and while events of the past year have caused investors to be generally more cautious in the short term, longer term we expect the trend to continue. As well as the swap transaction we also went live with a new equity trading capability earlier this year, another example of our strategy to build our business in KSA.
[Asharq Al-Awsat] You entered the market through a joint venture (MSSA), what is the strategy of business in Saudi?
[John J. Mack] We’ve been pleased with MSSA and we’re continuing to invest in the business to ensure that we have a market leading presence in the Kingdom. The strategy is to offer a broad range of services to our clients in the kingdom including investment banking, sales & trading, asset and wealth management.
We’re also very focused on ensuring that we employ the best talent, as it is only by having the best people that we can offer the best services to clients. We think that employing the best talent locally, people with the right skill set and local knowledge, gives us a key competitive advantage.
[Asharq Al-Awsat] The Saudi Stock market is growing with new listed companies, what role Morgan Stanley hopes to play.
[John J. Mack] We hope to play a leading role in that development. We’ve already demonstrated our ability to construct innovative investment solutions, such as executing the first swap on the Saudi market, and our IPO track record globally is second to none, so we’re very focused on ensuring that we deliver these skills and knowledge to our clients in the Kingdom.
[Asharq Al-Awsat] To which extent was the Saudi financial sector affected by the opening of international banks and investment institutions?
[John J. Mack] Overall, I think the impact of international banks and investment institutions has been largely positive – the competition makes local players raise their game, which overall can only be good news for clients. Of course increased competition can also lead to some change in the sector, which can be uncomfortable for some, but ultimately if it means that clients benefit, it’s got to be positive.
[Asharq Al-Awsat] What is the impact to Global Investment Banks of the loss of professionals to Investment Banking Boutiques serving middle market or niche customers? Is consolidation in this new middle market / niche customers’ space expected?
[John J. Mack] The existence of boutique investment banks is not a new development, and they definitely have a role to play in the financial markets and are able to provide certain clients with specialized advice in particular situations. An analysis of their market share over time shows that it has remained relatively stable, and has not grown substantially. So while they have a role to play, it remains a limited role. In regard to the loss of senior talent from the global investment banks to this sector, there will always be senior bankers who want to work in a smaller environment or focus on a select group of clients. There is also always a deep bench of talent behind them at the global investment banks who are eager and willing to step into their shoes.
[Asharq Al-Awsat] Continued G8 and G20 efforts to implement coordinated expansionary measure have continued to stall. What kind of coordinated efforts do you believe are needed at this point to restore confidence and invigorate global economic conditions?
[John J. Mack] Efforts to address the causes of the financial crisis and, one hopes, stave off future crises are underway at the global and national levels. While progress has been slow, I would not describe it as stalled, although I agree with you that we are at risk of losing the momentum and impetus for reform.
We strongly welcome the G20 efforts to deliver coordinated change across a wide range of vital issues. To assure we have a strong and stable financial system going forward, both the industry and the regulators need to seize this opportunity for fundamental reform.
In crafting these reforms, it is important that regulators not lose sight of the fact that financial markets are global in nature. Investors around the world invest in multiple markets either directly or through financial intermediaries. Reforms that are perceived as protectionist or which are created or implemented unevenly will undermine the ability to assess and oversee systemic risk globally and will create regulatory arbitrage opportunities. I therefore agree with many of the leaders of the G20 that it is important to move forward in a coordinated manner. While it is important not to lose momentum, quality and consistency of reform are more important than speed.
[Asharq Al-Awsat] What is your view on the Islamic banking industry?
[John J. Mack] Islamic banking is becoming a significant part of the banking business. It suits a growing number of investors and corporate alike, and so is now viewed as an increasingly important part of a global bank’s capability.