Morgan Stanley’s James Gorman says markets will ‘take off’ as Federal Reserve turns to interest rate cuts

Financial markets will “take off” once investors are sure that the Federal Reserve has finished lifting interest rates, outgoing Morgan Stanley chief executive James Gorman has predicted, offering an upbeat outlook for his successor. 

In a wide-ranging interview with the Financial Times days before he hands over as CEO to Morgan Stanley co-president Ted Pick, Gorman also said the banking system had become much safer in his 14-year tenure, leaving “their own stupidity” as one of the biggest threats still facing banks. 

Financial markets and parts of Morgan Stanley’s own investment banking business struggled to adjust to the Fed’s aggressive campaign to stamp out inflation, and investors are now digesting mixed messages from central bank officials over when rate cuts will begin.  

“The shock of the rate increase recently has put a damper on banking deals [and] capital markets deals. And that is [because] everybody doesn’t really know what their cost of financing is,” Gorman told the FT.

“The minute the Federal Reserve has concretely signalled that they’ve stopped raising rates, let alone the point at which they first do a rate cut, these markets will take off. And we are right in the centre of where that action is going to be.”

Gorman, 65, will step down as chief executive on January 1, handing the reins to Pick.

“I do not want to be CEO anymore. I’ve loved it. I’ve loved all of it. I’ve done it for 14 years, that’s enough,” he said.

The two other candidates for the top job — Andy Saperstein and Dan Simkowitz — are staying on as co-presidents. Gorman will also stick around as executive chair for Pick’s first year in the job, capping an unusually smooth leadership transition for Wall Street.

“You can tell Morgan Stanley is run by a management consultant and Goldman Sachs has been run by traders and bankers,” said one Goldman banker, drawing a contrast with the power struggle between David Solomon and Harvey Schwartz in Goldman’s 2018 succession race. 

The smooth process has branded Gorman as a kind of succession savant. He is set to join Walt Disney’s board next year where he will sit on a special succession planning committee. Disney’s directors and chief executive Bob Iger have faced fire from investors and governance experts for poor succession planning, with Iger returning to run the company in 2022 after his handpicked successor lasted less than three years.

“It’s not specifically why I’m joining their board, and it will be up to the Disney CEO and chair as to how I work in those processes,” Gorman said. “[Succession] is something I’m very passionate about. I think about our talent management here over decades.”

Gorman, an Australian described by colleagues as an introvert, was not a natural candidate for one of Wall Street’s biggest jobs. After becoming a senior partner at McKinsey and a stint at Merrill Lynch, he joined Morgan Stanley in 2006 and succeeded John Mack as chief executive just four years later. 

Gorman has grown into the role, becoming more confident in opining about the work of the Fed and casually telling investors recently that Morgan Stanley would eventually manage $20tn in assets, more than three times the amount it currently oversees. 

“The James Gorman we’re seeing now is not the James Gorman from year one,” said one person who has known him for years. “James is an introvert who’s become very polished.”

Morgan Stanley almost collapsed during the 2008 financial crisis and its future still appeared uncertain when Gorman took over in 2010. He diversified its business away from investment banking and trading, activities that are unloved by investors due to their unpredictability, and doubled down on wealth and asset management, which are considered more reliable businesses. 

This push helped Morgan Stanley’s market capitalisation leapfrog that of longtime rival Goldman Sachs, which is now also trying to grow in wealth and asset management. 

Gorman rated his time as chief executive at an A-, saying a higher grade would be immodest and it would be “false modesty” to pick a lower grade. 

“We did well, objectively. The stock has basically tripled.” 

Gorman reflected that new rules since the financial crisis requiring banks to hold more capital and exit riskier activities had made the system much safer, to the point that the biggest threats to banks now are operational factors such as cyber security, artificial intelligence and “the stupidity of their own management”. 

The high-profile failures of three regional US banks this year — Silicon Valley Bank, Signature Bank and First Republic — were “entirely their own doing”, he said. He also singled out Credit Suisse, which collapsed in March and was bought by UBS, as an example of operational risk management gone awry.

“It’s not by chance that the only institution globally, of the systemic [relevant] institutions, to have effectively failed — and they didn’t actually fail from a capital and balance sheet and liquidity perspective — was Credit Suisse. They failed from an operating risk and managerial perspective.”

The large European banks have struggled since the financial crisis, allowing US rivals such as Morgan Stanley to grow far larger, but Gorman said the coming years offered chances for the Europeans to close that gap.

“At one point in time, each of Credit Suisse, UBS, Barclays and Deutsche were bigger than us. And now we’re about the same size as all of them combined, and for a while we were bigger,” Gorman said.

“I don’t think [over] the next decade the gap will be as large. I think there’s opportunities for the Europeans, but it was certainly a miss for much of the last decade,” he added.

Looking ahead, Gorman said he planned to spend more time teaching in his role as chair of Columbia’s business school but that “for once in my life not having a clear plan, that’s a good thing”.

“It’s a big world. I didn’t spend my whole life trying to be a CEO of a bank,” he said. “So I’m not going to spend the rest of my life continuing to be CEO of a bank.”