Morgan Stanley (MS) Earnings Call Transcript & Summary

All right. I think we'll get started. Good afternoon, everyone. For our next fireside chat, I'm delighted to welcome back Ted Pick from Morgan Stanley to the conference. Many of you know Ted already. But for those who don't, Ted is the Head of the Institutional Securities business at Morgan Stanley and also the core Head of Corporate Strategy that has a good history at Morgan Stanley. He sort of shot to fame, if you like, during the financial crisis, leading the Morgan Stanley Equities business to become the #1 franchise on the street, then even more impressively, stabilized the FICC business, which was a zero underperformance before that. And now Ted runs all of the institutional businesses as well as corporate strategy, as I said. So welcome Ted, and thanks for coming to the conference again.

Christian, thank you for having me. It's great to be here.

Okay. Before I get started, I have to read the disclaimer that was sent to you by Morgan Stanley. This discussion may include forward-looking statements, which reflects Morgan Stanley's management's current estimates and are subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake the obligation to update forward-looking statements. This discussion, which is copyrighted by Morgan Stanley and may not be duplicated or reproduced without a consent, is not an offer to buy or sell any security.

Okay. Well done. I agree with all of that.

And then the last housekeeping item. If you want somebody to question, feel free to do it by the pigeon hole system. I'm assuming you know how that works because I'm [indiscernible] on myself.

So Ted, maybe a good place to start the conversation is on the macro backdrop, and then we can dig into some more in any specific issues. And needless to say the markets are incredibly choppy. What's your view on the state of the world today.

Well, Christian, it's an extraordinary moment. We have our first pandemic in 100 years. We have our first invasion in Europe in 75 years, and we have our first inflation around the world in 40 years. And none of those 3 are unprecedented. Our parents and our grandparents would tell us these things have happened before, but it is unusual, and it is extraordinary that they're all happening at the same time. And I think that when you look at the combination, the intersection of the pandemic, of the war, of the inflation, it signals paradigm shift, the end of 15 years of financial repression and the next hour to come. And our job is to help navigate clients on that journey.

How does that impact or what are the implications of that for the institutional securities businesses?

Well, Christian, I think it's been important to have a balanced and global investment bank. If you think about the years leading into the pandemic, that was a time when we had very low interest rates, low inflation, of course, it made sense to be invested in public equities, especially large cap tech that acted as bond proxy. Then 2020 came out of the blue, the exogenous shock and suddenly, companies, investors were in defense mode, save me mode, rescue mode. And at that time, it mattered for us to have a debt capital markets business that could work closely with the equities business that it carried us through those pre-pandemic years. Now that, that debt Capital Markets Group needed to help companies raise capital, to obtain additional buffers to be ready for potentially very tough situation, which at some level was resolved by the Fed coming in and the government coming in after that. But at the time, it wasn't known. Then you flash forward to 2021. And it seemed like we were going to get through COVID. The war hadn't yet gotten going and folks were relevering again. We were still at 0 rates, negative real rates, and of course, the financial sponsor community, the hedge fund community, they really got going, and that was very good for our bankers and our equity capital markets business took off. We had enormous IPO activity. And then we got to the war, and we got to the beginning of 2022 and the inflation that was incipient is now boiled over. And that, of course, has taken our fixed income business, which has been largely dormant for most of the years of financial repression and really kicked it into high gear because, of course, now with the central banking community fighting inflation, you need to focus on where the interest rate curve is, you need to worry about foreign exchange. And all of this is to say that in a pretty short period of time, we've needed the balance of a global investment bank. Not just by business geography, but by location too, there have been times when 2 years ago, the Asia sphere was very active with the IPO market, Greater China. And now Europe is busy again, along with the United States. So that balance, Christian, has been critical to help our clients navigate pre-COVID, 2020 rescue, 2021 offense, 2022 uncertainty.

So given that backdrop, what is the outlook? How do you think about the outlook for these businesses?

The outlook. That is a tough one. I'm sort of interested in all the folks that we are listening to, we are getting just a torrent of information from people who seem to have certainty on outlook. I am uncertain, and I am positive that I'm uncertain. The reality is that there is a fire narrative, and that fire narrative is inflation. And then there's a bit of an ice narrative, which is that recession talk, hard landing, soft landing. I think today, we should be focused on the inflation piece. Our economists have CPI going out at 4.6% in 2022. The PCE indicator, which is the Fed likes at 3.7%, 3.7%, 4.6% that's higher than 2% or 3%. So the inflation is here. And the Fed and the central banking community is on it. For our navigation of clients, though, I feel like the most important thing we can do during this paradigm shift period is to give them comfort that we can help with moments where you need a telescope and moments where you need a microscope. Moments where you need a telescope is there's this big sea of trees, and I need to know something that may have already changed and could affect my business, affect us and the C-suite in the boardroom. An example of that may be supply chains. We don't know whether we're going into a multipolar world or not, but we know from COVID, and we know from the invasion that the geopolitical realm has changed. History has resumed, which means that the old supply chain mentality of faster, better, cheaper, has changed, maybe it's slowbalization, which is a nice term that our guys came up with this idea that maybe it's not faster, better, cheaper, but it is more reliable. Well, if you're the CEO, that is implications for inputs, maybe there's more inflation, maybe you need to pass that along, maybe you can't. But our job is to help that CEO, help her express the need to be ready for that change to come through the business model. That's the telescope. The microscope is a power company misses or there's marginal operating margin degradation, hedge fund managers down on the year, hedge fund manager is nervous. Is this the reason why you should delever and sell all my retailers? That one data point, that one operating margin statistic for one quarter in a spreadsheet is that the canary in the coal mine. And so that's kind of a long way of saying that our job is to help clients think about the telescope and the microscope and take them on this journey because what we do know is that paradigm shift is going to take time, that 15 years of financial repression do not just go to what's next in 3 or 6 months. We'll be having this conversation for the next 12, 18, 24 months.

Okay. So when I use the telescope, the microscope slowbalization.

Do you like that? Do you like that? Good.

Some great freezes there. Inflation...

New material. I just want to see if you like that.

Inflation for the first time in 40 years or highest in 40 years. How should we think about the medium-term outlook for investment banking fee pools and I mean both traditional capital markets and trading fee pools.

Sure. The fee pools. So we think about the fee pools traditionally as revenues amongst the 9 global investment banks. Not surprisingly, during those years of financial repression, the fee pools were in and around $145 billion, between $140 billion and $150 billion. They didn't move much. Then as you know, on welcome as COVID was, the fee pools exploded. And in 2020, we had fee pools over $200 billion. Then in 2021, we all talked about the fact that maybe the fee pools would be between 2019 and before, the $145 billion, and that $200 billion in 2020. But again, 2021 was $200 billion, surprisingly, very active. But in part because there was a reaction function to enormous amount of defense that needs to be applied back to $200 billion. Now a pivot to potentially we're going to get through this. That again kept us elevated. The geography of those revenues change, but still a higher run rate $150 billion is now $200 billion. And in fact, the first quarter this year has been around [ 55 ]. Now as you know, Christian, what's important to remember is that the business is now being led by the fixed income business. So we had a -- we've had really a regime change in terms of what divisions are leading in a global investment bank when it was equities before and then it was some investment banking led by the underwriting calendar. Well, today, there's a lot of fixed income activity because, again, people are trying to figure out what to do about rates and foreign exchange. There's some credit activity. But the new issue calendar is extremely quiet. There have been $5 billion of total global IPOs to date. And last year, the number was 500. So we can do the math on that. The underwriting calendar is very, very slow, especially on the equity side. And the banking calendar too is quieted down a bit because people are trying to figure out whether we're going to have this paradigm shift clarified sooner or later. If I think about it in broad terms for our business, I'd say that the markets business is doing quite well, continues to do quite well. Clients are active. They're repositioning, they're hedging risk. We have these periods where it feels awfully fiery and other periods where it fuels icy and clients need to navigate around that. And then the banking business because the calendar is so slow street-wide, that is considerably slower. And to your question on what that means for the medium term, I think we're going to know more in the fall. Will GDP growth continue at around 2% and will inflation kind of start normalizing? The Fed will continue to hike, but it will feel more goldilocks-y than not, softer. Well, then I'd be pretty bullish about the second half and certainly going to next year. On the other hand, if the inflation and especially the inflationary expectations are cementing and the Fed's really got to push hard, and it's got to go into restrictive territory and the effect of the balance sheet coming down really moves rates higher, that could keep banking business slower. But the reality is that this paradigm shift at some point will bring in a new cycle because it's been so long since we've had to consider what a world is like with real interest rates. Real cost of capital that will distinguish winning companies from losing companies, winning stocks from losing stocks. And ultimately, as you know, in our business, we're -- we're market makers. We offer solutions to corporate clients, and we help intermediate and manage risk. So I like our business in a higher rate environment over the medium and longer term.

Interesting. Well, let's switch into the business, talk about Morgan Stanley specifically, particularly with your new role as Co-Head of strategy. I think most people tend to think about Morgan Stanley as a collection of businesses. So you have an institutional group, you have the wealth manager and the investment management business. Can you just talk about the strategic advantage of having sort of all 3 of those businesses together, what -- is there a case here where 1 plus 1 plus 1 equals more than 3?

It's actually a great question because the Morgan Stanley history around the collection of businesses, as you know, is a long winding history. When Morgan Stanley merged with Dean Witter in 1997, the retail business of the firm of the Morgan Stanley part of the firm was inside our institutional equities business. It was a high net worth business. It was a great business, but it was small in the context of what was then Morgan Stanley. And now a lot of years have passed. And we'd like to think of ourselves as a group of one. We've got a world-class wealth and asset manager. As you know, $5 trillion of wealth, $5 trillion, $1.5 trillion of investment management equals $6.5 million, and we've got this integrated investment bank, which I manage, which we'd like to think is a top 1, 2, 3 investment bank around the world. The question has always been, can you get these 2 halves to work together in a way that makes it interesting for shareholders, for stakeholders? Is there real synergy to be had not just in terms of capital efficiency and maybe even some cost efficiency, but actual behavioral efficiency. And so thinking about that, I'd say version 1.0 of that experiment of that journey was kind of getting to know you. Getting to know you took about 2 decades, okay? Getting to know you, brown bag lunches, various management teams, trying to crack the code, getting to know you. Version 2.0 started to kick in after James engineered -- James Gorman, our Chairman and CEO engineered the Smith Barney merger. Then our wealth business had come of age. And now the investment bank and the wealth business found reasons to work together. For example, ultra-high net worth, family-owned business, reaches a point where there should be a disposition, a legacy sale. Well, why not call an M&A banker and have that M&A banker join in on the deal team to help that wealth client sell their business. Episodic, interesting but not really thematic. Now we're 3.0. 3.0 is you've got this triangle of these 3 businesses. And on the scenes of those triangles, there are businesses with cash flows and a terminal value that are accretive to the proposition of owning Morgan Stanley as existing entity. Example one, we bought Eaton Vance in the throes of COVID, a collection of wonderful businesses, including a world-class tax management product called Parametric. Parametric now is sold increasingly day by day in a rigorous way inside of the 16,000, 17,000 FAs, courtesy of that investment manage intellectual capital that exists in Parametric, Parametric into wealth. Second example, we have in our institutional equities a fund services business. We're the last sell-side firm to have that business. That is, as you know, the calculation and statementing of net asset values for typically for hedge funds and other asset managers. Well, what about all of the family offices and ultra high net worth folks around the country who want the feel of what they had when they were managing that hedge fund. They're now running their family office, but they still want to have that institutional experience. Well, we've been able to take the technology kit from the fund services business and transport it into what is effectively an outsourced CIO product. So now we have something that is really differentiated amongst this ultra-high net worth group that can relive their institutional experience on a scaled basis, attracts them to Morgan Stanley, gives them the flavor of an institutional experience. It has scaling effect. So there are examples like that, and then there's sort of a big one, which I'm most excited about. So the other acquisition is you know we made during the crisis, the most recent COVID crisis, actually, the month before was that of E*TRADE. So E*TRADE takes us from self-directed trading, through the advisory channel to what we like to know term workplace, all right? And workplace is about a defined contribution world where you have your stock plan and the stock vests, and maybe you make a sale and now you have cash in your account, wow, you may need some advice. First, you might get an E*TRADE broker, maybe you'll get a financial adviser, if it's a large sum, maybe you don't want to make a sale and pay capital gains so you need some advice. That workplace mandate is for one large cap company. One large cap company or one mid-cap company has one provider, all right? And the combination of Morgan Stanley, legacy Morgan Stanley Wealth, E*TRADE and a small company called Solium that we bought, basically capture about 40% of the S&P covering workplace. So 40% of the S&P 500 have Morgan Stanley driving their workplace engine. Again, one provider who can give advice to all the employees as their stock vests. Well, what if the banker who works in Menlo Park has a world-class relationship with a large-cap technology company that we could think of, and we haven't been able to crack the nut to get workplace in. Wouldn't it be great that the CEO or the CFO could get us a meeting with the head of HR to talk about potential workplace mandate. Vice versa, what if we have that large cap technologies, workplace mandate and we need a banking introduction. So these are 3 totally different examples where in the first case, you have investment management, tax product going into wealth. And the second example, you have institutional equities, technology, DNA going into wealth. And then the third example, you have bankers and wealth managers through the workplace funnel working together. I mean for me, Christian, that is incredibly exciting because as you know, once you have that mandate, it becomes very hard to unlock if the client, whether they're high net worth or their corporate character is getting statementing that is reliable, they're likely to stick with it as long as it works well. So all of that, in my mind, contributes to the seams between the wealth ballast and the engine of the Investment Bank.

Perfect. Going back to institutional business. The market share gains have actually been pretty remarkable, mostly over your time. I think overall market share has gone from something like 11% to near 15% over the last few years. Maybe just take us back to understand sort of what drove that? What are the drivers of that? And then almost more -- maybe more importantly, where does it -- is it sustainable? And where does it go from here?

Well, after the crisis, the financial crisis, we were in a group of 9 and we had 11 share. And I'd say, if you have 11 share and you're 1 of 9, is probably not great. And so the question becomes, what can you do to push the ball further? And I'd say with humility, a lot of his grip is determination. It's a couple of steps forward and a step backward. You and I met 6 years ago, in Florida. And that was...

And you look exactly the same.

Well, I mean, I got a haircut, so I'm hoping, you look better. But that was when we cut 25% of our fixed income resourcing. And we had made an existential decision at that point that we were going to be in the fixed income business. If you're going to run an investment bank, you better be in the fixed income business because the debt stack has the biggest notional of any product in the world and always will, and we want to be a global investment bank at that. But we need to run the fixed income business in a critically incredibly determined way. And so the question became as a noncommercial bank, could we do that? Especially in the heart of financial repression, there's not a lot going on at rate, not like going on FX, can you guys kind of keep it together? And the team did a wonderful job they hung in there. Each team had helped build us to the place for when the team came in, in '15 and '16. They could effectively take the technology practice from equities, our MSET electronic practice, anticipate that fixed income at some point would become technology affected business, even though it's traded largely on a principal basis, where the equitizing of fixed income was coming. And we just -- it was a slot. We kept on going. And then you and I met again here 3 years ago. So 6 years ago and then 3 years ago and 3 years ago, we talked about the integrated investment bank, right? And at that point, we had gotten kind of ROEs from 9 to 11. Bearing in mind that the fee pool is static. So we're gaining share, very focused on returns, very focused on bankers, equities people and fixed income people working together. Mobility of folks driven to one solution for clients and easier said than done, but we were working in. And the team was galvanized to get that done. So that actually, while we never would have guessed something like COVID could happen, we had a pretty good sense that if we could get to a moment where the denominator, that $145 billion would finally liberate that we would experience operating leverage. And as it turns out, as you know, Christian, when the $145 billion went to $200 billion, we were able to keep actually gain a little share [ 14 ] to [ 15 ]. And importantly, because investors and other stakeholders want to know this, we'll never have the durability of the ballast in the wealth business. But if you have an engine, an investment bank, can it generate operating leverage? And the answer was yes. 35% margins, 20-plus returns on capital. So a golden period to be sure, but one where the preparation had been done. So what's very important for us as we think about clients navigating this uncertainty now is that the global investment bank has the resourcing that it needs to maintain share, but our investment bank working within this construct that makes Morgan Stanley unique so that we're very much focused on where we have risk, what returns are generated and which clients we're putting that towards.

And then looking forward to share, where do you think it goes? And is it sustainable?

I like our share here. I do. Now it doesn't mean that we're settling for it. But the way we think about our share, Christian, as you know, is imagine 3 types of business inside the investment bank. Equities related, that could be equity sales and trading, cash execution, prime brokerage, equity derivatives hedging or it could be the ECM business, the underwriting of IPOs and follow-ons. We like that number around 20%. We have a world-class equities business, #1 for a bunch of years, world-class ECM, leading underwriting as we speak. So [ 20 ] shares seems right. We found actually pushing share too much above that. We haven't necessarily been able to hold price. We don't necessarily like incremental concentration of risk. So in the roughly [ 20 ] area feels right. At the other end of the spectrum, [ 20 ] obviously being a battle every day, by the way. [ 10 ] for fixed income and fixed income underwriting. As a noncommercial bank, we were at [ 6 ]. We went to [ 8 ] and now the team has done a wonderful job, we're at [ 10 ]. [ 10 ] seems like a good number in a world where there's a lot to do in the fixed income universe. It's not just macro, but of course, we have this commodity super cycle that's kicked in, thanks to both COVID and the war and the mandate of ESG against it, very interesting time to be in the commodities complex and to be intermediating that risk. Underwriting of debt, high yield bank loans, debt capital markets, [ 10 ] seems like the right number. So [ 20 ] equity, [ 10 ] fixed income. Then the middle is banking. And there, we've had share at about [ 15 ]. And if you said, okay, come on, give me one area where you'd be pushing a little bit. I think through the cycle might be there. The [ 15 ] is a great number. We have a world-class M&A practice, top 1, 2, 3 in the world in any given year. But I think corporate finance industry expertise, given the paradigm shift and given we're going to have these crosscurrents of fire and ice affecting different companies, different ways in a multipolar world, Things got a heck of a lot more complicated in the last 3 years, corporate finance industry advice. Plus, we have a super cycle now financial sponsors, literally trillions of dry powder. They need advice. So I like the idea of covering mid-cap companies, leading sponsors, mid-cap sponsors. But I say all of that, Christian knowing we may be late in the cycle. And if we're late in the cycle, this isn't the time to go hire a couple of hundred bankers. That is the oldest story of investment banking. We are extraordinarily procyclical. So we want to be rifle shot on that. Who we're going to hire, why we're going to hire them. We have a great TMT practice. We've hired some energy-related bankers who can help with ESG transition. That may be where we want to go. So the paradigm, I think, is [ 10 ], [ 15 ], [ 20 ] and maybe push on that [ 15 ] a bit.

Okay. Perfect. I would say a big part of your strategy has been sort of a global practice i.e., not just in the U.S., but deep into Europe and Asia. But it does feel like we're in a period of globalization, I think you use the word slowbalization or something, it's a good phrase. How committed are you to your global footprint in a world of deglobalization? And then maybe can you talk about your non-U.S. businesses, how do you do it and how you see them growing going forward?

I'm glad you asked that, very focused. If you're going to have a global investment bank, that can't be a U.S. bank with international operations. So we're spending a lot of time outside the U.S. And I've been hitting the road pretty extensively because the reality is we can't just wait for paradigm shift to be resolved. So we need to express our strategic views based on where we're putting chips not just on the business balance that I described, but on the geographic balance. The U.S., of course, for all the reasons we know will continue to have secular tailwinds. I like Continental Europe. Brexit and the invasion were not of Europe's asking, quite the contrary as we know. But in sort of a twist of history here, it has actually galvanized the continent in a way that was unimaginable. Macron has been reelected with a reasonable majority. The French and Germans are working together. And you recall, 10 years ago, we were talking about Euro existentialism. And now we're talking about Eurocentric growth. Maybe demography is going to start turning around? Sure. Could there be a recession down the road? It's called an economic cycle. But I like the continent. I like it for its rule of law, the quality of education and the adjacency to our world-class U.K. business and our linkages to that which we do best, which is advising clients, intermediating risk, helping express a view. And that, I think, is going to be much the focus as capital, asset managers, companies start going to Europe. There will be more of an unsecured lending market finally. There will be the building, I think, of equity capital instead of the next great biotech company being in the U.S., why can't it be in France? [indiscernible] listed and the equity stack following along. So I think the post-Brexit reality of war continent, Paris, Germany, very interesting. We've been devising a little experiments. For example, we started up a quant center just to get a sense for where young people coming out of university, the great universities in Paris, some of the stats will help us model. Could there be interest in a unit like that to help retain people and get the best of Europe and the very early tea leaves are very positive. The second area that is obvious to mention, of course, is Asia, the greater China complex is where you'd start. We're having a moment in time bilaterally, U.S.-China. What I'd say, though, which may be a little against consensus is I'm bullish on Hong Kong. I understand how Hong Kong will have probably changed. But the reality is China will need Western Capital for a long time, and the West will look for a gateway into China for a long time. So will it be the Hong Kong of the last 20 years? Maybe not. Maybe it will be more like the Hong Kong before the handover, maybe even before that. But I think having a world-class offshore organization to help bridge to the 50, 100-year China story. I think that is absolutely critical if you're going to run a global investment bank. And it shouldn't surprise you that today we have a leading markets business. We have more prime brokerage assets facing China than ever before. A share funds are in the first inning, advice in and out of China is in the first, second inning. The other Asia comment I'd make, though, importantly, Christian, is Japan. So Japan is the author of Japanification, the original financial repression folks. They are on, let's say, 35 years now since the [ 89 ] top. And I think this is it. This is it. We are finally going to have a moment where not just U.S. interest rates, but global interest rates are going to lift off the 0 bottom because the food and energy exportation from the war will be with us for a long time, and that has enormous implications for Japan. The second biggest depositor in the world, again, high entrepreneurship, high innovation, rule of law, synergy with the West, but a need potentially to deploy these wealth assets in a way that has been thought about in 2 generations. Of course, financial sponsors and other asset managers are going to want in on that. They're going to want to be onshore. And Japan, of course, is going to want to be looking offshore to deploy those trapped deposits. So I'm very excited about Japan. As a Morgan Stanley shareholder, and as an executive at the firm, I'm also extremely excited about Japan because we have something differentiated, as you know. We've got a 22% shareholder in Mitsubishi, one of the great financial institutions in the world. They were there at the heart of crisis in '07, '08, '09 and the idea that we have them as our partner to reimagine what the markets businesses will look like. This is -- these are fixed income desk that depended on 0 interest rate policy for decades. Now they have to reconsider. Foreign exchange dollar yen has moved [ 20 ], [ 30 ] from part of [ 130 ]. So there will be a lot to do in the fixed income space. And of course, in the equity space because now you need to generate returns above 0 and then banking because there will be an enormous amount of activity, both within China, within China, within Japan, Japan out folks investing in Japan. And then for me, this gets back a little to my workplace comment earlier about the synergies of the wealth business and the investment bank at Morgan Stanley. The most exciting thing that as an investment banker growing up through our ISG businesses, at Morgan Stanley thinking about our firm's interaction with Mitsubishi in Japan, it's wealth. All of the wealth projects that we're going to be able to work on together as Japanese companies get to an age where they start giving out stock to their employees where the incentive structure looks more like the West, we're not even in the first inning of that. And the numbers as Mitsubishi would tell you given their deposit base are spectacular. Long answer, but I -- again, I'm very excited about the continent, Continental Europe and Greater China and particularly Japan over the next 5, 10, 20 years.

Big call, end of Japanification. Maybe putting back your strategy hat on here and think about the broader firm, Morgan Stanley. What would you see as the biggest opportunities for the whole firm over the next few years?

James engineered the Smith Barney merger in '09, and then we transacted with 2 of the biggest M&A deals in the post-financial crisis arrow with E*TRADE, as you know, a month before pandemic was known and then Eaton Vance a year later. So I think it's fair to say that our job, all of us is to bed those 2 acquisitions, get them right. So far, the cultural synergies, the business synergies have been better than expected, going real well but we are all aware that financial services mergers or consolidations or combinations have historically been fraught. And we're very happy to report that they're going well, but that is our focus, making sure we get the best of both the E*TRADE and Eaton Vance cultures and then the Morgan Stanley culture on top of that and make sure that they are winners. There are asset management and wealth tuck-in acquisitions that could potentially be made as we grow both of those businesses. I think they will be very project-specific, and we'll have to fit in well with what we're doing without moving the perimeter too much.

Okay. Perfect. Let's talk about balance sheet and risk given this dynamic environment. I think I'm increasingly seen Morgan Stanley flex balance sheet in banking deals. The Musk-Twitter deal was one that caught my eye. Morgan Stanley financing that. Is that a deliberate -- first of all, am I correct? Is that a deliberate strategy? Has anything changed in Morgan Stanley's approach to flexing its balance sheet?

It's a good question. We in the early years of financial crisis needed to go real slow because there was a lot of self-help and slow walk up the mountain. I think we've gotten to a point where we are very comfortable in our own skin, where there are situations where a significant balance sheet is called for, we can do that. I think there was a period where the view was, well, you need to lead with balance sheet because how are you going to compete with those commercial banks. And there were other periods where like we shouldn't be talking about lending at all, we should be winning on intellectual capital. In the world we're living in today, it's kind of a false choice. You need both. You need to be able to offer intellectual capital, solutions, the entire kit and balance sheet matters, too. So Christian, I like our balance sheet size relative to the business. It allows us to have the share that we have, the operating leverage we have. But do we have the green visors on broadly with clients on where returns are over the long term. Absolutely, we do. We're also shareholders thinking about this I'd like to think beautiful ballast and engine where it's not just about the capital going to a particular division. It's thinking about where the capital could best go in the firm as a whole or be returned to shareholders. As you know, there's been a pretty exciting capital return story. So that's the combination of factors but my short answer would be I like where our balance sheet is. It allows us to do the kind of business we want with the clients we want.

Okay. Perfect. I have one more, but I'll maybe switch over to some investor questions, first of all. And the first one is, given Morgan Stanley's valuation versus some of the European banks, would it make sense to do cross-border M&A, for example, Credit Suisse.

I think we're good where we are right now. As I said, E*TRADE, Eaton Vance, 2 big deals, excellent for the continued flourishing of our narrative, not the time to be engaging in some kind of large M&A transaction with -- and highly unlikely to pass any kind of regulatory scrutiny in any case. I think the best thing we can do right now is be in execution mode and mind our way through this paradigm shift, which is going to take a lot of focus over the next 6, 12, 18 months.

Okay. Another one. The question is basically your target ROTCE for the firm is over 20-plus percent versus doing 20%-ish in 2021. But obviously, there was a benefit from a robust capital markets. So how does those targets look in a world where maybe the environment changes in terms of capital markets.

Well, '20 was definitely at the high end at that time of what we had ranged out. I think our ability to generate those levels is in part dependent on how the overall business outlook feels, but the moats are pretty deep now inside of wealth, inside of the asset management business. I mean, there's a reason we call it the ballast. It doesn't mean that it's impervious to market moves because, of course, if asset levels are lower, then by definition, the advisory fee is against a lower base but it's really proven itself to be durable. And that's why this balance sheet question that you asked is so important relative to the investment bank. We need to -- on the one hand, we need to be consistent with clients. One of the best things that's gone on with clients after all that we've been through since the financial crisis is we're viewed as consistently there. That was not the case for the first 2, 3, 5, 7 years. 12 years since the financial crisis going on, [ 15 ] we've been there. And now to our second crisis, which is the pandemic and everything else. So I think to the extent that we need to move capital in or out of the investment bank to help guide overall returns over this course of the cycle, we will do that. But what we're unlikely to do is try to sort of manage to a specific outcome in a given short period. The reality is that we know that if we're anywhere close to the $6 billion, $7 billion, $8 billion a quarter that the investment bank has been doing, we are generating some operating leverage in that business. And then, of course, the higher end you are creating on that 20%. If you're lower, then it's a tougher call. But I think the flexibility that we have in managing that capital is an important differentiator.

Okay. And then one last one from the audience. Does 2019 seem like a good baseline for normal capital markets activity? Or is there some reason that issuance and other activity should be structurally higher?

Yes, that's a great question. It depends on whether you're looking at the number or you're looking at the geography of those revenues. I think the reality is that 2019 was the last year of financial repression. So there was not that much to do in fixed income, sure there was excellent credit business that we have, securitized lending, good, decent spread, very little default risk with the benefit of hindsight. Not much to do in macro, not that much to do in commodities. Great time for the equities business, as I said, because you could run a lot of cheap leverage in a prime brokerage business on behalf of asset managers. And the banking business was pretty good that there was a reasonable turn out of financial sponsor harvesting of IPOs and sell sides and the like. 2022, 2023 is going to be different than that, by definition, right? Because we are in this paradigm shift. So the inflation will be with us. There will be periods where you will feel fiery and that could be very interesting for market making all kinds of regime changes, for example, a TMT portfolio, go hire some energy analysts yesterday, look for some FIG guys today. And that takes time because there are periods where it's like, no, there isn't paradigm shift. Today, again, it feels like it's fiery, last week it felt icy. So market-making businesses, I think, will be more active, more broadly. The question is the banking business, and I think that is more a question of when the cycle resets. When the cycle resets, then I think we will be at a more elevated level because there will be more to do because the important part of the end of financial repression, which is positive, is it brings a true cost of capital to running businesses, winners and losers. And of course, our job is to help advise and bank the winners. And by definition, that means there will be more transactions, more tickets, and that's good for the M&A practice and the underwriting practice, which are still the highest margin businesses that we have.

Okay. So again, sitting in your new role, President, running strategy. What have been the main lessons or takeaways that you've learned over your time in your new role?

Well, the best part of the job has been to work with my partner, Andy Saperstein, who is Morgan Stanley Co-President as well. We cover clients together, which again speaks to how this firm has evolved. It's extraordinary. There is a lot to do. I've been able to work with Dan Simkowitz, who is Co-Head of Strategy. A lot of the big strategic stuff has been done, thanks to Mr. Gorman, but there is more that we are doing and looking around corners. So the #1 piece of this has been notwithstanding everything that's going on in the world, we're a determined bunch. We were all there during the financial crisis. A number of us have been there, I'll be 30 years in August. We want to see the firm do a lot more exciting things. And that galvanizes us to be humble and very focused.

If you don't mind, I'll sneak one more question in around market structure given your background and kind of what you do. Did the pandemic accelerate digitization within markets? We know equities already is quite electronic. Well, you've talked a lot about the acquisition of FICC, for example, how did the pandemic change that? Has it been sticky? Do you see a structural shift in terms of electronification of markets?

That's an interesting question. The fact that we're able to work largely remote, although our markets folks came in throughout the crisis. So for this return to office conversation dialectic that's going on, we had markets, people that were coming into the office every day, which spoke to the need for people to be near the machinery. And the machinery worked in a hybrid model. So that, in a way, was a test case to the digitization of markets being able to withstand even the most extraordinary exogenous shock, which in a way, speaks to the fact that the machine will continue to grow and will grow across fixed income product. But it also spoke to the need for people to help oversee the risk architecture, to help provide liquidity, to help make judgments around changes in volatility structure in less-than-expected risk model scenarios actually playing out for a moment to moment. It's one thing to have the model spit out of tail, it's another thing to be managing it. So I think the paradox is this. Do I think the reality is that we will continue to pour more money into our machines every day? Yes. To have the world's leading cash business where we trade 15% of all of the daily cash volumes in the United States. Does that mean we need to put more money into the ground every year? Absolutely. So we're not a technology company, but the output is very much technology-driven. But the magic is not just a machine, it's the risk management and the sales and the content delivery around the machine. It's the conferences, it's the relationship. It's the day when the name may open down 30%. Do I make a sale on the first print where there's a lot of volume or do I work with the sales trader over the next couple of days to fees the position? Or do I try to do something through the options market to hedge that? That is the alchemy of the machine and the woman working together to execute the trade. And I think that hybrid is going to be with us for a long time.

Perfect. With that, I think we'll stop and thank you very much. That was great. Thank you.

Thanks, Christian. Appreciate it. Thanks for having me.