Morgan Stanley (MS) Earnings Call Transcript & Summary

Well, before we get started, I have a few disclaimers I have to read. One is for important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. There's also another disclaimer I need to read. This discussion may include forward-looking statements, which reflect Morgan Stanley management's current estimates and subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statements. This discussion, which is copyrighted by Morgan Stanley and may not be duplicated or reproduced without their consent, is not an offer to buy any security. Okay. So with that...

Wouldn't life be so much more efficient if in every investor meeting, every room all over the world, you didn't have to do that. If there was just code, Code 6, and you'd say that, right? There's got to be -- I've got to talk to the SEC about this.

Okay.

It's ridiculous. Why do we do this? I mean I know why you do it, but...

Well, I do it because I was asked to.

No, I know why you do it. I'm just saying. But why does the SEC requires to repeat something -- anyway.

So maybe, AI...

I digressed, sorry.

Can AI have a solution for that?

Cool.

Okay. So everyone knows James Gorman. James, Chairman and CEO of Morgan Stanley. You're in your 14th year as CEO, which nicely aligns with our conference as this is our 14th year as well. So I'm pleased to say that management approved the beginning of the conference when you joined as CEO, started the...

You're a great analyst. So it was an easy call.

You're so kind.

Well, It's true.

And 12 years Chairman. So that's exciting. Now the most exciting news is that this will be your last conference with us as CEO, which is bittersweet, but want to just see if you could walk us through why you made the announcement you did recently and also shed some light on what you think the Board is looking for in a successor?

Sure. Well, thanks, and congrats again for the 14 years. It's been phenomenal. I was thinking as I was coming over the first conference I did, and this sort of little moment of history with DLJ. Remember them before they became Credit Suisse, before it became UBS today. And for Joan Solotar in 1999. So there have been a lot of conferences. On the succession stuff, I mean, I've said right from the get-go that I think you should be intentional about succession, and you should run it like a process just like we run budgeting or strategic planning or all our talent review processes. And it shouldn't be kind of something that's done on a whim or is triggered by one's age or by good events or go out when things are great, people keep saying or on bad events or -- and I just -- I've been saying for a long time, it matters. In my first Board meeting in January in 2010, I told the directors who should replace me if something happened to me. I said you'll do what you want, but at least here's my opinion. And every couple of years, we reviewed the process. About 5 years ago, I said I'd leave in about 5 years. About 3 years ago, I said I'd leave in about 3 years. And I just got back from a triple all through the Middle East and France and the U.K. and everybody kept saying to me so you're going to stay another 3 years. And I think there's something in the general view that people don't mean it when they say it, but I definitely mean it. And I said, "no". So if the market thinks that we need to sort of rip the bandaid off, and I thought an elegant way to do it was around the annual meeting to say before the next annual meeting, I will have stepped down. The exact timing, it's up to the Board and a few of the things that we're working our way through. I'm -- we've got -- as you know, a bunch of things going on at the moment. Obviously, it's a more complicated environment. We're about to get the CCAR results. We're about to get Basel III first like look, which I'm sure we'll talk about. We're dealing with some internal stuff. We've had this investigation that's been in the media about the block stuff, and there's a whole range of things that I wouldn't mind either getting set or dealing with before if I step down. So whoever replaces me has a complete clean sheet, and I think most of that will happen within a year, maybe well within a year, and we're off to the races. But I just think it's important to separate the person from the process. There should be a process and not an individual's whim of what they want to do. It's what's right for Morgan Stanley for the next -- as a shareholder, I'm focused on the next 10 years, not on the next 10 months or something. So that was it. The Board has been great. We are completely aligned. We've got a great committee chair by Dennis Nally, running the process and the full Board, Tom Glocer. And we have fortunately 3 great internal candidates. So what we're looking for, firstly, the obvious is do you go external -- or have to look externally and the Board, and certainly, it's my view strongly is that we've deliberately built a team over a decade that is positioned to take over. And frankly, we have a team a decade behind them that's positioned -- I sort of have a 20-year runway in my hopes and dreams, whether it plays out exactly, we'll see. But I know how hard it is to do these jobs and how much complexity there is. So having somebody who is culturally assimilated as part of the leadership group, has sat in every key operating committee decision, every capital decision, every acquisition that we've done is a real advantage as somebody who effectively came from the outside, I was only at Morgan Stanley about 2 years, I think, a bit over when I became CEO. So having that long history and working together and each of the 3 candidates that we've named publicly has that. As to what you look for, I think, a lot of people focus on what business you're running and whether a business is doing well or not. Well, if that were the criteria I wouldn't have got the job because I was running the smallest and worst-performing business. So I think that's to be a great operator is necessary. So certainly, if you're running your business poorly, you would be disqualified. And fortunately, we've got 3 people running great businesses really well. So that's necessary, but it's not sufficient. You've got to deal with a very wide range of constituents, and deal with them on a global basis. You've got to deal with global regulators. You've got to deal with the, obviously, the media, the public side of the job. and you've got to have a lot of resilience. I think, physical resilience, mental resilience. And I think you've got to be prepared to make the call. When we bought Smith Barney, people -- most of Morgan Stanley was telling me we should be selling retail, not doubling up on it. When we bought Eaton Vance, everybody said you overpaid by $1 billion. I said I know, but we bought it. The other options don't overpay and don't own it. When we bought E*TRADE, everybody said -- a lot of people said, well, trading just gone to 0, payment for order flow is in flux, culturally very different. And I said they're all irrelevant. What we're planning is a 10-year transition of the business model. And for that, you've got to make 10-year bets. And whether you overpay, I've said often, or underpaid by $1 billion is just not relevant. In fact, I would bet there's very few people in this room who could tell us what we paid for Smith Barney. So the reality is a leader of an organization has to be prepared to make the call and live with the consequences of being wrong a fair bit of the time. And that is not to everybody. Everybody wants to have top jobs of any institution, universities or not-for-profit to anything, but they don't necessarily want the responsibility and the accountability that goes with that. And that's what we're trying to sort through. So it's a great process. I'm really proud of the way it's working. And I feel great about handing it over. 14 years is a long time to do anything. Sorry, it's a long answer, but it's an important one.

No, no. I think you gave us a lot of color and a lot of insight into how you're thinking and what you're looking for. I'll go through a few more questions, but we will turn to questions in the audience in case you have any. Don't be shy. One of the areas, obviously, that we wanted to focus in on is the mix shift in the business model that you've been responsible for. You were running the Wealth and Investment Management business. It's $30 billion in revenues. Institutional Securities, $24 billion in revenues. And when you became CEO in 2010, Wealth and Investment Management pretax profit mix was about 26%. Now that's up at 52%. So you've materially shifted the firm's financial profile to something with higher growth, less risk. And in the strategic update in January, you suggested that the firm could get to an even higher portion from Wealth and Investment Management of pretax profit by 2025 plus. I'm not sure if the emphasis is on the plus or not. But in setting that goal, could you help us understand what you were thinking about with regard to the drivers of shifting that pretax margin?

Well, I think it's really just math. I mean the industry structure around the securities business broadly defined as trading all the way through underwriting advisory, it kind of -- it grows a little fast in GDP for sure. I mean right now, as I'm sure we talk about it, it's in a trough, right? But that's not a permanent thing. That's just a -- it has moments like this. We happen to be having one now. We have one in I think it's 2015, maybe a little bit in '18. Very few as you have these troughs, but I see through all of that. I'm focused on the trajectory. And the business will keep growing. There's fewer competitors, there's kind of 4, 5 fish global, truly global firms who operate in all the fixed income commodities, macro, micro and across equity derivatives, cash, prime brokerage, banking, M&A, everywhere from Japan to Saudi to Frankfurt to New York and underwriting businesses. It's the scale of doing that is really hard to create now. Maybe 20 years ago, it was possible. And 10 years ago, it was very difficult. I think it's impossible now. So the good news about that business is it has just structural moats by -- driven by the size and complexity and the regulatory complexity of running those kinds of businesses. The reality, though, is it will grow given that it's sort of unassailable, but it will grow faster than GDP, but not -- it just won't -- you'll have spurts, but then you'll have these troughs. So the aggregate growth line will be strong, but not sort of transformative. Whereas in Wealth and Asset Management, you still have huge market share opportunities that have just not been realized. I mean, we're -- just take Wealth Management for a start, we're 95% in the U.S. And last time I checked there are a few foreigners who have got money. And figuring out the right way into that and the right vehicle and now that we've got E*TRADE and the stock plan business, we can take globally I think there are -- and I'm sure we'll talk about this. There are sort of endless opportunities in that space. And asset management is the last nonconsolidated part of large financial services and you're starting to see it. The Franklin-Legg deal, the TPG deal that just got announced. You're going to see more of this, right? You're going to see more [ alt ] players merging, and you're going to see more people with multi-vertical from fund of funds to wallets to money market funds to all the alpha stuff from -- and we've done it. We've got it with the tax effective with Parametric. We've got it with Calvert, with sustainability, we've got that, but we could easily get bigger than that. So just mathematically, as you step back, tremendous moats around the institutional businesses, and they will grow faster than GDP and they will come out of this trough and not concerned about that at all, but sort of disproportionate growth on the other side. So just arithmetically, you end up with -- wealth and asset management will get bigger. It will, for sure, be a bigger part of this firm. And then you start getting into both acquisition strategy and capital strategy, and we'll talk about Basel and what that might do and all that sort of stuff. So I think that's why it came out that it's just sort of inevitable.

So maybe we could drill down...

Without diminishing, sorry, the institutional business. Some people have taken it to read through, "Oh, you must be shrinking institution." That's not true at all. I always said the mistake the sort of the perception -- mistaken perception about our strategy was we've become a wealth and asset management business. It's totally false. What we did was attach a viable wealth and asset management business to a world-class institutional business. And we've still got a world-class institutional business.

Okay. That clears that up very nicely. Maybe we could dig into one of the other goals that you announced, I believe, this past January, on the net new asset growth goal. You outlined that you thought the firm could generate $1 trillion every 3 years. And I wanted to understand how you're thinking about the drivers of that. Is that all organic? Does it include inorganic? And maybe speak to the different wealth channels that are behind it.

Well, it's funny. I was with my team in the office this morning, and, the first presentation I did to our Board, which I happen to have, was a pretty brutal analysis of our then retail business, which was the old dim-witted business with a little bit of Morgan Stanley Private Wealth. And in it I sort of assessed where we were on various measures. I mean, I'll give you one fun fact, at least I thought was fun. We paid out that year in Southern Florida, 17% of revenues in legal expenses, right? So if you start with your margin, you start at, I don't know, legal should be like 1%. So you start at 99%. We were starting at 83%. And the margin for the business for the full year was 8%, for the last quarter it was 3%. But the other fun fact was our net new money for 2005 for the full year was negative $5 billion -- $3 billion, negative $3 billion for the whole year. And the -- I had an aspiration chart. By the way, the aspiration on pretax margin was to get to 20%, which everybody thought was completely nuts. The net new money aspiration was $30 billion, 3-0, and now it's $300 billion and whatever, $330 billion. I think it's -- I'm highly confident about this. I think this full this will definitely happen. In fact, it's happened for the last 3 years. It's not going to be dependent upon deals, although we've done 2 institutional RA deals in the last couple of years, and they were probably in some last year's number. I forget it was last year or the year before. But we brought in $110 billion in the first quarter. Second quarter, you get some tax effect in April. There's some negative flows as people pay their taxes. So it's typically not as good, but it won't be bad. And the full year, yes, I think we'll be right on track. So it just, and Andy Saperstein and Jed Finn and Ben Huneke and others, Ben Swin, have described as funnel impact of type filling up the bath tub. Before we had kind of 1 hose and 1 plug. The hose was how many people you could hire and the plug was how many people bailed and went to another firm for a better bid. That was the game. It's basically recruiting. Recruiting is irrelevant now. We lost 2 people last week. We get the numbers on Friday night. About 6:00, we lost 2 people. One of them to a firm I never heard of, and we gained 2 people. This is across 15,000. So if you're -- we're averaging about 4 a week in and out. If you're doing 4 week, on 50 weeks, it's 200 people on 15,000. So recruiting is finished. And the reason for that is because we own E.F. Hutton and [indiscernible], Legg Mason, Robbie Humphreys, Dean Witter, Reynolds & Co, Smith Barney, Shearson, Lehman, that's 1 firm. That's us. So the recruiting game is over. It's onesies and twosies, but it's all these other bits and pieces. And you just look at dividends and interest on $4 trillion. I mean that's money. So most people take it out. That just keeps compounding. So we've got this enormous embedded compound. Then you've got the great rush that's coming from, which I think is sort of the next frontier, which is the whole retirement of workspace. The conversion, first quarter, we had great conversion of leads from the workplace in the financial advisers. So I think it was about $25 billion. Again, it won't be as high, I suspect in this kind of tax environment. But once you get past that, that alone is a pipe we didn't even have, right? We didn't have E*TRADE clients converting, workplace clients converting, so nonexistent. That alone created a 1 quarter nearly what my aspiration was back in 2006 for the whole business. So it's kind of crazy. I mean it's definitely going to happen. And I feel more confident about this than I felt about the 20% margin or any of the other metrics because math just drives it. It's people rich the dirty -- a little secret is rich people get rich faster than other people, and compounds and interest bank falls straight in the bathtub.

So when you...

I wish I was staying to see it. It's going to be '23, by the way, but I can't say that because I'll get in trouble with them.

But it's interesting because you did put this out in January and then have your announcement just in April, and some folks have said, "Hey, was that a mic drop to your successor, but the way you've just described it...

Just beginning. It's just beginning and it's a thing of beauty. It really is.

So now when I'm thinking about the 3 channels, the advisor-led workplace self-directed. Is any one of those channels a bigger contributor?

Well, right now, the biggest is definitely adviser-led, not because the recruits in and out, just the sheer volume of money coming off the back of their accounts. But in the future, I think it's going to migrate. The direct will not be the biggest I suspect ever because just sheer size, it can't get there. But the really interesting one is the whole workplace side. If you go out 10 years or maybe shorter, and I might be contradicting what Andy said. But my view is definitely adviser 1, direct 2, Workplace 3, now. In 10 years, it could be 2, 3, 1.

Got it. Okay. Maybe we could turn a little bit to technology, just as it relates to the wealth channel because you've seen your team delivering best-in-class technology across the wealth channels. And as you think through the next couple of years, is there more that tech can do to deliver some of this NNA? Or is that just icing on the cake?

Well, I mean, one of our competitors once said that they weren't a financial institution, they're a technology company. And I think that's so politely, I disagree. We're a regulated bank. But we use technology in everything we do, and I think that team has got really smart about it. And think about E*TRADE is basically a brand and technology platform. That's what E*TRADE is. So we bought a lot of technology. We bought a digital platform, which we were building and spending a couple of hundred million dollars a year. By the way, we haven't fully integrated E*TRADE. That's another thing I wanted to get done. I promised the Board when we did Eaton Vance and E*TRADE, I would stay through about 3 years to make sure they landed safely. And we're doing the -- we just did, I think, 2 weekends ago, a conversion of about 30-plus percent of E*TRADE onto the 1 platform of Broadridge, and we -- and that went really well. We did a trial earlier in the year. We did that one now. We know it works. So now we're just gets -- so that will happen in the next few months. I mean, I think some of the stuff they've done with Next Best Action, the sort of virtual financial advisers now rolling out AI. The partner we have with OpenAI, which is basically, it's an internal system to take all of Morgan Stanley's information, your research, and present it to financial advisers with the click of a finger. I think makes you, the question is, do these things lead you to need fuel people or do your existing people become more productive. And I'm firmly in the second camp. There will be some elements of what we do. We just don't need somebody to create a program. It can all be done for you. But my excitement is they can do a better job serving, understanding what clients really have financially, what their needs are and servicing them. And it's going to bring in much more banking product because they'll have more capacity for it. In a generational wealth transfer, have more capacity to deal with the family. So I think it's very positive. I've got a much -- I would say this about the team there. They've got a much stronger technology bent than I have when I was running the business. I think it really has leapfrogged from way past where my capabilities were. So that's exciting. It's like a whole new frontier opens up.

And it sounds a bit more revenue generative than expensive...

Oh, yes. This is all -- it's not all, but a lot of it is front office stuff.

Now before we turn to Investment Management, one last on wealth. You know there's questions out there about what if we're in a higher for longer rate environment. And then you get into the questions and the concerns around deposits, wealth deposits, how do they buy grade? And is there a revenue reduction in the wealth channel that is there for you to offset, how would you offset that?

Well, I personally don't think we're in a higher for longer. I think the Fed is getting very, very close to the end. I don't -- my gut is they're not there, but they're within 1 or 2 hikes. I don't think we're going to see a cut this year. I think they'll sit on that for a while. I would sit on it. I'd make sure you got it right. And then I assume all things being equal, you would expect cuts to occur at some point during next year and bring it down a little bit from whether we finish in the high 5-ish percent to more like to 3% probably over time. So there's going to be a lot of movement on that. On our narrow deposit, we've certainly seen -- it's been -- be careful what I said. It's been different this quarter from the previous several quarters. April, some deposits leave to pay for taxes, not as many as maybe we thought. May, things look pretty moderate, frankly, more normal, if I will. And June, it's a bit too early. So I don't think there'll be a lot of drama on the deposit front. And I don't think another 25 or 50 basis points, frankly, creates a lot of drama. So I think -- and then you've got -- we've got a lot of money sitting in cash or cash equivalents now and you'll create revenue when those start getting invested. We've got nearly 25% of the total assets and cash equivalents right now, which is extraordinary. So I'm not bothered by this. I think, the margins on that business that will clearly be hurt this quarter because we'll have severance. We've got the final integration pieces that are coming through, and there's been no new issue stuff, no calendar stuff. So it's -- that just mathematically makes it a tough quarter. But I think it will finish the year strong and next year, I think, is going to be really good for that business, so...

Okay. Let's turn to Investment Management. You already spoke a little bit about Eaton Vance acquiring a few years ago, which has brought a tremendous platform, best-in-class customization, tax solutions for institutional and wealth clients. Are there any other strategies or geographies that you think we should be leaning into?

Well, we're still probably more U.S. -- I mean, being U.S.-centric in wealth, firstly is, if you have to be in 1 place, you want to be in the U.S. And to be a monster in the U.S. is like a category killer, going to Vietnam and Indonesia and Malaysia and the Philippines and Thailand and Taiwan and Japan and across all of Europe, all with different jurisdictions all -- lots of investor protector rules and local licenses and things, it's hard. So well, we're more likely to go international through workplace, through direct or maybe in Japan with our partnership with MUFG. Some things we could do, highly unlikely to do private banking. We don't -- we owned a private bank across Europe for 21 years, we've made money not once out of 21 years. So you need to know, right? We are subscale, a lot of business there gets done inside private banks. I think as a Fed-regulated institution you wouldn't want to do and the clients wouldn't want to be with you. So sort of mutual dislike. With asset management, it's completely different. I mean the first is how do you broaden the number of verticals, so they're at scale. So you have -- on the old side, we've got a really good real estate business, rebuilt since the crisis. The infrastructure business has done great. The mezz business. PE is small, but performing well. Then you've got all the fund of funds business, then you move into the deep value stuff that's been done out of London. The growth side, obviously covered through Dennis Lynch. Atlanta Funds, we picked up with Eaton Vance and you have Parametric, which has had huge positive flows and is a complete natural fit with our wealth strategy. Calvert, which I think is just at the beginning of what we can do with that platform. And then all the fixed income, which we consolidated. So we've got the pieces now. Any of those pieces can go internationally. I mean one of the reasons we bought Mesa West, which is a credit shop was basically give them global distribution. And that's worked great. So I would see us doing more deals in asset management and being quite geographically agnostic, be the way I'd see that.

Okay. Let's turn to institutional securities. M&A and underwriting has been under pressure for the past year now. What's your view on how long this lasts, and what do you think the catalyst for a higher level of activity is in those 2 threats?

Well, Boards need to know if you're financing a transaction sort of what are the conditions of about the time you get to close. And for that, you need some sense of where rates are going to go. If you have the highest rate increase in 40 years, you're a pretty brave Board that's putting up to a major transaction in that environment. You want to kind of see where this thing ends. As soon as I think the Fed indicates they're done, you're starting to see activity pick up. We're seeing -- we're clearly seeing more green shoots. I'm having more discussions with CEOs. I talked to them about deals that they want to do, but they're not quite ready yet. So I think it's -- I had thought it's back half of this year. There'll be more evidence in the back half of this year than the front half. For sure, it will improve. But I think you'll see more run rate type stuff through next year on the M&A and new issue calendar. I mean we're starting to see some stuff. I talked to [indiscernible] who runs our Capital Markets, a couple of days ago. He's feeling a little more confident, more conversations. But it's been pretty horrible. I mean let's be honest, but doesn't mean the corporations, I mean, if I were staying other 10 years, I'd definitely be doing more deals. I might do them right now, but it wouldn't be 3 years sitting around on my hands waiting. So I think there's a time when Boards and CEOs just say, okay, we know enough to know we can move forward. Let's move forward.

Higher degree of confidence basically what you want...

Yes, it's coming.

Okay. On institutional securities, maybe it's a good opportunity to see what you're seeing with regard to any trends in the quarter that you want to share across banking and trading?

Well, I think maybe it was Andy in one of the conferences somebody said, I think it was Andy, a notable decline, which was a good word. I haven't seen that used before, which meaningful notable, and I think some of our competitors said 25% year-over-year. You've always got to look at where somebody started a year ago, what actual their numbers were in that quarter. So I'm never too excited about relative percent change. It's just down and it's meaningfully down. My gut tells me, and this is probably not a good read, but it's certainly really pretty well over time. I would say I feel like we've bottomed on this. And I just feel the tone is a little better, I think getting through the debt ceiling, what a joke that we had to go through that again. I mean we all know where it's going to end. So why can't you just do it and save us 3 months of ridiculous daily news media distraction, but that, I think that where the Fed is at, the political -- politics here is just going to be rough. And I think everybody just has to accept that, but there's going to be more action in the market. I can -- I just -- I'm starting to see that. But right now yes, Q2, I don't know, down notably. I thought that was a good answer.

And you mentioned earlier that in 2Q, there will be some severance to reflect the fact that there was a reduction in force. Do you feel that now you're at a point where you're good on that front. I'm just wondering how you position the business for profitability today and share gains.

Yes. It's interesting. I mean we -- during COVID, we guaranteed everybody their job. And I think that was definitely the right thing to do. It's just at a human level. Everybody is dealing with so much stress, mental health, kids at home. I mean you don't want them worrying about have they got a job, and it's Morgan Stanley. I mean we can afford it, and we did it. We kind of expected there'd be a real uptick in attrition. And for like 3 months right at the end of that period, we saw an uptick, I think, the first quarter of last year. And then it's like straight line, like down. And we're at really low levels of attrition. I mean it's nice. It's flattering, but we want to grow, right? We bring in. We just brought in -- I just spoke to 778 interns on the Intrepid a couple of days ago. We want this new blood coming in. So I challenged the team last December to take a look, and I think they brought their head count down by 3%, then we promote a lot of people to get through January. And I said, we're going to take another look at the end of April, we did. And I said, if this hasn't turned, we're going to have another go at it than we did, and I think we took out about 3,500. I think it's -- you can never say for sure, but it's unlikely we'll be going back to that well. I think we've got it where we wanted. And we took out a lot of managing directors, creating capacity for others. I feel it's not pleasant. Nobody -- I hate doing this. I've done it many times in my career, but it was the right thing to do. You're trying to ensure you're balancing shareholders' interest with loyalty to employees and keeping the culture in place. And sometimes you got to make the hard call. It's back to where I started on the succession stuff. Sometimes you got to be the person who takes a few arrows because it's the right thing to do, and that's what we did.

All right. That was very clear. Just wondering if anybody in the room has a question, follow-up anywhere. So I'm happy to keep going, but oh, here we have.

You talked in your institutional business about it being a consolidated business and being sort of big moats. Usually, when you have those 2 characteristics, you see the competitors kind of extracting large surplus returns. And arguably, you're not doing -- not you, but the industry is not doing that in the institutional business. Is that just a timing thing? Or is it regulation? Or why not?

I think it takes some time for what I call the wannabes to finally give up. And the wannabes buy the most marginal business and do the most self damage with fees, so there's -- and I think that's starting to flush out. I think the Credit Suisse, UBS transaction is a pretty pivotal turning point, and I think it's a good warning sign. Any board of any other company that thinks they're going to get large in sales and trading globally. I mean it's not so easy, right? It's a very complicated business. And I think the bank balance sheet -- the other side of where we're going to go with capital, which is going to be more capital right under Basel will be -- will demand high returns on putting that capital to work. So there will be a trade-off in who's getting that capital higher-margin business. So it will happen, but it's not going to dramatically change the economics of the business. It will help offset the capital basis is where I come out at it.

Anybody else in the audience? All right. Just on that point on capital with Basel endgame coming, do you feel that this is something that you just absorb naturally? Or are there businesses that you think you're going to have to flex to get through this?

We're in a really interesting period. And this is one of the reasons why I want to stay for a bit to sort of get through, work through this. Firstly, we've got CCAR, which is going to be tougher. And remember, when CCAR came in around 2012, it was basically in lieu of Basel III because of whatever Basel was back then, because the U.S. was not ready to adopt. So they created effectively our own version of Basel internally. So there are a number of things going on right now. Number one, if you take the Basel III stuff on its face and particularly the way that they treat operating risk assets, RWAs are going up significantly. And then obviously, on the trading book and there's discussion around how they're trading mortgages. So there's kind of a real movement of foot in Basel. I think the -- based on just conversations I've had and the way these things typically play out, the first set of numbers that come out of sort of theoretical and will now likely to come will be ugly, right, for the industry. And then they'll say, well, that wasn't such a good idea. So the comment period is going to be very vigorous. And it's kind of hard to argue the big banks are undercapitalized when they're actually got together to support First Republic, right? It's like if we were weak, why did you want to take $25 billion or $30 billion of deposits? What's the deal? So -- and you look at our CET1 ratios, you look at how the banks have just -- I'm not just talking to Morgan Stanley, but generally, I think they're in really good shape. So the sort of the intellectual logic of, "Oh, my god, we missed something, we've got to redo capital," it's just not there. There's just no actual basis, except some academic reports that exist, let's say, banks should have capital of 98% of some -- I don't know. So I'm kind of in this very curious period where I think we're going to get an ugly sticker number for the industry. I think they're going to -- if they're smart, emphasize there is an extensive comment period. There will be a lot of battles that are already forming across the regulators and within the government on how aggressive they should be with the banking industry on this. And then you're going to have a long transition period, much longer than people think. I think the early transition that was put out there was projected most people thought January 1, 2025. I'd be very surprised, right? So -- and then you're going to have to redo CCAR with the stress capital buffers and all the other things to say, "Well, hang on, we're already accounting for the stuff here, we don't need this here." So as investors, I would just say to you and what I've said to our Board, be prepared for a lot of news, but don't be over-alarmed by it. This journey has a long way to go. I've talked to a lot of people about this, and there is no uniformity view around it. And just logically, again, I get back to, I mean -- we were thanked by the U.S. government and the Fed for our actions around First Republic. I called, in fact. Well, surely, we don't have capital. You wouldn't have wanted to do that if we had a capital problem. So I think this is a journey that -- and unfortunately, the smaller bank thing, what happened with Silicon and First Republic and Signature, which by the way, had, in my view, almost nothing, if not nothing to do with the regulatory change and oversight of those banks. This was managed from 101, but that's my view. It's had nothing to do with that. So I think -- but dropping the $250 billion down to wherever they go $100 billion probably makes sense, why not. Yes. So that's where I'm on that. I think it's definitely not going to end up where it starts, that I feel very strongly about.

Well, it will be exciting for us to be involved in...

Yes. It's how do you how do investors see through this period and comment periods and sort of worst-case scenarios, understand what worst-case scenarios is, but manage your investments. And I think there are going to be some potentially some investment opportunities. I mean if the banks trade off a lot on this, I'd be buyer.

All right. I will put you on speed dial.

Yes. Well, I'll be unemployed, so I'll need to do something...

No, no, no. I hear that you will be migrating over the next 12 months to Executive Chair.

Yes. I talked to the Board about that, and they'd be happy if I committed to a few years of doing it. I'm not going to do that. I think that's wrong. I think an executive chair role is simply to get out of the road organizationally, so you wouldn't sit on management committees, operating committees. So John Mack is the Executive Chair for a couple of years. And you don't need somebody else babysitting you. What you need is somebody to go to privately. These are very lonely and difficult jobs. And somebody you can trust and say, "here's what I'm thinking, how would you respond?" Or I just had this call from these regulators. How would you handle that? And I just want to be there to help whoever has this job succeed. And that means getting out of the road for running the business. That's, I mean it's not easy, but that's their job and help them on stuff that they've just never seen before. And that's why I put in the fingers for a period of time, which gives us total flexibility. The minute I think that it's safe to leave the room, I'm out of there because it's not fair. It's not right for an organization. Organizations grow. And under the next CEO, there will be a whole talent pool that will now take a step-up and under them another one. And that's what creates 10, 20, 30 years of great leadership.

So as you migrate into this executive chair role and you think about Morgan Stanley over the next 3, 5, 10 years, what are the opportunities that you're most looking forward to seeing the firm achieve?

Well, there's going to be sort of challenges and opportunities. I think there's going to be some interesting dynamics in the banking sector over the next 5 years. So it's going to call into question what sort of institution you want to be. So I think just strategically, that's -- will be a question thrown up by some of the changes in regulation. I think -- and secondly, I think we're, we've been long in the U.S., which has served us really well in the last decade. A little more global balance I think, would be positive. So they are the 2 sort of strategic stuff. In terms of the institutional business, I think, is phenomenal. We can certainly pick up share in banking. In equities, it's hard to do it around 20%. In fixed income, we're around 15% -- I'm sorry, 10%, and we're kind of okay with that. But I think it's -- with the moats I described, I think that business is in very good shape. It's well run. We've had our stumbles, we had our CAGRs. Just to say, we navigated through that, given the hand we were dealt and given that we were underwriting I think it was Viacom at the time, we had to kind of hold our positions and not blow them out, cost us some money, but we learned from that. That's one thing in a long, long run. So I think that business is good. I think asset management, there will be more deals done I think that business is getting to scale. It's well run. There's a really solid management team in there now, and we've picked some great people out of Eaton Vance, including Parametric, Calvert and Atlanta and also out of the old Morgan Stanley asset management business. I think what Dan's done there is great. And then with the wealth it's just, it's -- as I said, it's a thing of beauty. I mean it will be very hard to stop that machine. And I speak with some experience on this. Once you're compounding in that size, it's just very hard. And I don't know that there are domestic deals to be done. I think probably not. And internationally, you could, but I think you've got a trade off doing it on your own. And doing them in small markets makes no sense. If you're going to go internationally, go do it where there's real money.

Great. Well, James, thank you so much for your years of leadership and for your years of supporting our conference and our 14th conference and your 14th year as CEO. Appreciate your time, wisdom and insight. Thank you.

Thank you. Thanks, everybody.