Transcript of Charlie Rose's Interview With John J. Mack

8/14/2019 Transcript of Charlie Rose's Interview With John J. Mack

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The Charlie Rose Show - 1 - 1/20/2012

The Charlie Rose Show Session One

Guest:John Mack

Charlie Rose:John Mack is here. He is the Chairman and CEO of the legendary Wall Street firm,Morgan Stanley. Over the past two years, he has fought to keep the financial crisis fromoverwhelming his bank. After last year's collapse of Bear Stearns and Lehman Brothers,Morgan Stanley's stock fell over 80 percent in a year. The bank eventually stabilized lastfall when Mitsubishi bought a 21 percent stake in the bank. The bank has also receivedbillions [spelled phonetically] from the government's Troubled Asset Relief Program.Earlier this month John Mack was one of several top Wall Street executives summonedby Congress to testify about the program.[clip playing]The government's effort to rescue the nation's ailing banks continues. The Obama

administration today announced that it may sharply increase its stake in major banks ifthe government determines they're too weak to survive. Public reports indicate that thegovernment could take common shares of Citigroup, the embattled banking giant, themarkets remain shaky today on the news with the Dow Jones industrial average droppingto 7,115 points, its lowest level since May, 1997. I am pleased to have John Mack backon this program, and in a full disclosure, I note that he has been a friend for some 40years. We went to the same school. Our fathers at different ends of the state were in thesame business. I occasionally do things with Morgan Stanley, and we were married tosisters. All of that in a long term relationship with a man I admire and consider a friend,but we want to have an interesting conversation here this evening because he is at thecenter of one of the most dramatic economic developments I have certain ever seen.

Welcome. Having said that.

John Mack:Thank you, Charlie.

Charlie Rose:You and I growing up in North Carolina never imagined that we'd sit at a table like thisand talk about the most extraordinary financial crisis, economic crisis the world has seensince the great depression.

John Mack:You're exactly right. I don't think anyone had any idea that this could happen. And Ithink that's part of the problem. I think as we got into the crisis, it was very difficult tolook out and see how bad it was going to be, how severe it was going to be. Some of thesolutions and some of the things that were put into effect at the time we thought wereenough and clearly, either the fed or the treasury thought they were enough. But the factis, it was a lot worse. And it's not enough, and it's not just the United States. It's global.I was just in China, I was in the Middle East, I was over in France, in the Netherlands, in

the U.K., in Spain. All these countries are going through a radical change. Some a lot

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worse than others. Clearly the China and Middle East are faring better. But you go toeastern Europe, you go to Spain, Italy, they're all having a tough time.

Charlie Rose:And what does a tough time mean?

John Mack:Tough time means that there has been either a boom in real estate, there has beenoverleveraging, there has been huge growth, there have been a lot of loans extended, andnow those loans are coming due. They can't be paid. Projects that were being built arestopped. If you look at China, which is a huge export nation, exports are downdramatically. Even though they have very big reserves and will be able to put money intoinfrastructure and keep people employed, they're suffering from this. The Middle Eastclearly has had a boom with the energy prices and what's gone on. Just in Dubai, thingshave slowed down. I don't know if you saw in the paper today that $20 billion is comingfrom Abu Dahbi to help buy the debt of Dubai and keep them on target to pay their debt

service. You go to Italy, you go to Germany, it doesn't make any difference. The banksare leveraged. Just like here in the United States. Just like in the U.K. But I think in theUnited States, we are ahead as far as deleveraging. If you look at Morgan Stanley --

Charlie Rose:Explain to the audience what deleveraging means.

John Mack:Well, basically you take one dollar and borrow 10 times or 30 times against that onedollar. And at the peak, as I said, when I was Washington, Morgan Stanley hadleveraged 31 times, so we took one dollar and turned it into $31. We had a balance sheetof over a trillion dollars. And we have taken that down dramatically, as the other banks--

Charlie Rose:To what? Something like 16 or 17?

John Mack:We're below that. We're probably at 12 times leverage. We've taken our balance sheetfrom 1.1 trillion to about 600 billion. So it's come down dramatically.

Charlie Rose:When you -- take China, for one example. Secretary of State, who you supported as apolitical candidate and I assume is a friend of yours is over there, and clearly, she'stalking about, that they can do together, the Chinese government and the Americangovernment, about climate control and things like that. How she's not talking abouthuman rights, gotten some criticism for that. But what she's also taking to them about iswhether they're going to continue to want to lend money to the United States.

John Mack:



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Right.

Charlie Rose:What's your impression of their attitude about that?

John Mack:Well, my impression is that they will continue. I mean I think I read today either in thejournal, the Financial Times, either Yan Sheshaun [spelled phonetically] or one of thesenior members, I think Wan Sheshaun, is one of the vice premieres.

Charlie Rose:Yeah, go ahead.

John Mack:And someone I've known for 15 years. It's very clear that the U.S. and China in manyways are tied together. We are a huge buyer of the products that they produce. They

understand that. When you think about -- if you're going the invest, where would youinvest, I think the Chinese understand there is stability in this country. This is a benefitfor the two countries working together. And clearly, they own a lot of our debt, and, youknow --

Charlie Rose:More than any other nation in the world?

John Mack:Well, without question, Charlie. But if you think about it, that's probably been one of thebest investments anyone has made over the last two years, when you see how rates havecome down, which is increased on a principle amount. Their principle activity with thesebonds. So I think the two countries will work together. I also think that SecretaryClinton, on her first meeting there, approached it the right way. I'm glad she didn't bringup some of the issues that have been so --

Charlie Rose:Divide.

John Mack:And I'm sure she will at some point, but not on your first meeting. You're trying to buildbridges. I think she went about it exactly the right way.

Charlie Rose:While we're in Asia, Japan. Japan went through a terrible experience in the '90s, andeverybody talks about the lessons of Japan. What are the lessons of Japan?

John Mack:Well, the lessons of Japan would be that once they went through that severe restructuring,they had a lot of bad real estate on their books. If you remember, the banks, all merged



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together, all -- I'm going from probably let's say eight to 10 banks, they have come intothree very large banks. There was consolidation. And then you get through this financialcrisis, and you say how do you get the economy going again? And that crisis has beenvery difficult. Yes, they have a high savings rate, but the consumer is not spendingmoney. The businesses, the growth has been very slow. Around the 1% level. If they

got lucky, it would be a little higher than that. And today, they are still suffering fromwhat happened back in the early '90s.

Charlie Rose:The question of oil prices down to where they are. What implications are there in termsof politics that Iran is selling oil at $40 a barrel, the Saudis are selling oil at that price,Iraq in terms of its economic recovery. The whole Middle East. What's the politicalimplication?

John Mack:Well, Charlie, I've heard two arguments on finance. I think I can talk with a lot more

authority. One argument is that with the price of oil dropping as dramatically as it has, ittakes away some of the power and clout that these countries have.

Charlie Rose:Russia is certainly feeling that.

John Mack:Russia without question. But can Iran finance some of the programs they have beenfinancing, because at one point you had oil at $150 a barrel. Can Chavez in Venezuela beas active as he has been in the past now that oil is trading below $40 a barrel. So there isa view, with the price of oil dropping so dramatically, that it takes away some of the cloutthese countries have had. The other side of the is you need to go into the Middle East asone of the major producers and say, you know, what are they budgeting their economyon? Did they budget oil at $60 a barrel? Or at $30 a barrel? And there is a view,especially in Saudi Arabia who have been doing this for a very long time, I would argue,I don't know at what price they budgeted their oil, but I think they have been veryconservative. So in many ways those countries that have been conservative and built abudget on oil at a much lower price, they will clearly a readjustment, but I think will bevery stable.

Charlie Rose:Today, the economy, where are we in terms of capital markets and where are we in termsof credit and where are we in terms of how long it takes to stop the decline? If you cananswer that, everybody on Wall Street will be listening.

John Mack:Exactly, Charlie. Look. I don't know where we stop the decline but a couple of thingshave happened. If you go back to the middle of September when Secretary Paulson andChairman Bernanke had us down at the fed with Tim Geithner -- and it was the weekendthat Lehman went bankrupt. It was when Merrill Lynch and Bank of America announced



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their deal. In that period of time the credit markets were absolutely shut. You could notgo into the market and raise debt. And that happened from, you know, the end ofSeptember right up into probably the middle of November, so all of a sudden, marketshave opened up slowly.

Charlie Rose:In the last three months?

John Mack:I'd say in the last three months. Just this year from January 1 until today, there hasprobably been about 100 billion in debt financing. One of the large was deals ever,maybe the largest, Roache raised $16 billion in bond debt. That was unthinkable fourmonths ago.

Charlie Rose:But they are very credit worthy --

John Mack:No, I understand that, but let's -- you know, there are others. There are others. Yeah,let's go to high yield --

Charlie Rose:AAA rating, you should be able to raise money.

John Mack:All right. Let's go to high yield securities.

Charlie Rose:Right.

John Mack:In December, we raised I think it was a double-D piece of paper for El Paso Natural Gas.You know, just recently we did a transaction that was 600 basis points richer than inDecember. We were able to do -- and not just Morgan Stanley. Other banks clearly havedone it. We've been able to go in the high yield market.

Charlie Rose:But do I hear you saying it's becoming unstuck?

John Mack:It is becoming unstuck.

Charlie Rose:And that's really what's necessary in part to get the economy back on track.



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John Mack:That is a piece of it, without question. People or firms need to be able to fund in thecapital markets. And its becoming unstuck. Now, pieces of it are not unstuck. And whatyou read about and hear about today, if you look at the TALF legislation, we need to getunstuck, if that's the right term. We need to do that in an asset-backed area [spelled

phonetically]. We need to figure out a way where we can start securitizing again andtaking either credit card debt or mortgage debt off the books and get investors to buythem. And that's going to take more time. And that's one of the things that secretaryGeithner is focused on. And what we need is more details on how that's going to work.

Charlie Rose:Does anybody you know know how much and the value of all those securitized markets-- I mean mortgage securities? What's the word of the toxic assets? And where arethey?

John Mack:

Well, I think we all know where they are. What we don't know is what the value is.

Charlie Rose:Because there's no market for them.

John Mack:Well, there's no market for -- the market's just not functioning. That's one piece of it.Another piece of it is if you look at the housing market, and prices continue to drop,prices keep changing, and within that market, there are different credits. So it makes itvery difficult for any one person to say this is the value. And that's one of the challengesthat I think we all have, is if we go down the road of a good bank, bad bank, what is theprice that you put these assets into the bad bank? That's going to be a challenge.

Charlie Rose:Chuck Schumer says it's almost impossible right now. I mean it could be -- the[unintelligible] the value could be anywhere between $2 and $4 trillion.

John Mack:I think he's right. That's why it's going to be so difficult to do.

Charlie Rose:And how would the value be established?

John Mack:Well, there are a number of ways. I mean, one way is to do an evaluation of specificstructures. Another way is to go out in the marketplace and say, we will sell these assets.Make a bid. So if you could get --



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Charlie Rose:[unintelligible] that that's the market.

John Mack:That's the market working. And if the government is willing, and which has been hinted

to, that may happen to help finance some much these purchases, which could work, thenyou have a lot of smart people doing their due diligence. And you can get a bid that. Isthe best way to determine price. But I think investors -- and there's a fair amount ofmoney out there, Charlie, to come into the market. So someone gave me the figure thatthere's close to $3 trillion in money market accounts.

Charlie Rose:Waiting.

John Mack:Waiting to be invested. I mean --

Charlie Rose:And what would be the signal for them to start investing?

John Mack:Well, I think stability and clarity will be the signal. And you need to have a betterunderstanding of where we are in the cycle. That takes time. You know, there was a fairamount of criticism when Secretary Geithner came out with his proposal.

Charlie Rose:Well, they said that it was just incomplete was the principal criticism.

John Mack:That's correct. And I think it's a little unfair -- and this is really complicated. And I thinkthe market expected a solution. A solution is going to come over time, and it's going tocome with a number of people working together. I think Secretary Geithner is on theright track. And I think as we get into the details, and we get more clarity, we will findour way through this. But I got to tell you, go through a day like today or go back to lastFriday.

Charlie Rose:Just take us through a day like today.

John Mack:Well, it was pretty dismal.

Charlie Rose:You mean in terms of what the market was doing.



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John Mack:Absolutely.

Charlie Rose:Yeah.

John Mack:Absolutely. And what I --

Charlie Rose:Just take us -- sit where you sit. And what's a day like today?

John Mack:Well, to be honest with you, a day like today, I was trying to figure out what questionsbefore you going to ask me.

Charlie Rose:Well, I haven't gotten to the good ones, so you can rest assured --

John Mack:Look, it is a constant conversation with your Chief Risk Officer, your CFO, what are yousaying to the Fed, what is the Fed saying to you, what are we doing on our trading desk,where are we marking our positions. It's all about try to understand the opportunities inthe market but at the same time making sure there's transparency with our balance sheetand that we're communicating that to our regulators. That's on the one hand. On theother hand, if you talk to any client, I don't care who it is, as they should be, there's a lotof concern.

Charlie Rose:And what are their concerns?

John Mack:Where's the bottom? When do things get better? What's going to be the next step? Canwe come to the market? Should we do this deal? Everyone is postponing thosedecisions.

Charlie Rose:Because they don't know the answers to any of those questions.

John Mack:That's correct. But this is beginning to open up, and that's a huge positive.

Charlie Rose:All right, let me show you the cover which raises an interesting question. What do weneed from Washington in terms of helping create confidence which will help buildstability, which will enable these people to make decisions that can get the ball rolling?



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John Mack:Charlie, I think it's pretty simple, there's a plan, it needs to be laid out very clearly. Itneeds to have a group, not just investment banks or banks but investors, central banksworking together, it needs to be laid out very clearly, here are the four or five or six

things we're going to do to get this economy and not just in the U.S., on a global basis.This is what we need to do to get things going.

Charlie Rose:And that --

John Mack:It has to start here in the U.S.

Charlie Rose:Okay, but that's what the president ought to say tomorrow night then, it would just seem

to me, I mean, they're looking for leadership to say these are the five things --

John Mack:Sure.

Charlie Rose:-- that we're going to do. And just now before we leave this, tell me what you think thosefive things ought to be.

John Mack:Well, Charlie, number one, I give high marks to the president, in a very short period oftime, this is a economic war. And in a war you never know what the next battle's goingto be. He has put tremendous amount of focus and teams on this. There is no oneanswer. It's got to be worked through. I wish I could lay out one, two, three, four, five. Ican't.

Charlie Rose:Because it's uncharted waters.

John Mack:It's uncharted. I mean, let's go back. No one thought when we sat in that room in FederalReserve back in September that the impact that occurred with Lehman being bankruptwould have on the financial system. It froze the system. That's why the capital marketsclosed down. People could not take money from account A and put it in account B fromone bank to another bank.

Charlie Rose:Well, part of that was because they were scared to death that with the Lehman goingdown you knew you couldn't necessarily count on the government to rescue. And whenthat happened, is that part of it?



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John Mack:No. Well, I guess it is part of it. But at the time I don't think anyone thought that thesystem would freeze up with one bank going down.

Charlie Rose:Even if they went down.

John Mack:Exactly. I don't think Secretary Paulson at the time knew that. I mean I'm convinced hedid not know that.

Charlie Rose:Whats the worst scenario?

John Mack:

I don't want to go there. Well, the worst scenario is that we continue this decline,unemployment goes double digits, and we get huge deflation, and we could end up in avery long deep recession. That's the best [spelled phonetically] outcome --

Charlie Rose:That could extend for 10 -- for five years or longer.

John Mack:Oh, for sure it could. I don't think we're going there.

Charlie Rose:And it's not just in this country, it would extend around the world.

John Mack:Without question, but, Charlie, you know --

Charlie Rose:People'd be unemployed, banks would be failing --

John Mack:Right.

Charlie Rose:-- companies would be in bankruptcy.

John Mack:Without question, but if you read what the economists are writing, there's a consensusthat seems to be building, at the end of '09, maybe early 2010, you get a bottoming out ofthis economy, and you may bump along the bottom a little bit, and maybe sometime in2010 it picks up. I think with the coordination that's going on, on a global basis of central



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banks and regulators and the money that's being put in the system, not just here in theUnited States but globally, I'm optimistic we'll get out of this. But I got to tell youbetween now and then it's going to be a rocky road.

Charlie Rose:

Do you worry that your -- that Morgan Stanley will survive?

John Mack:I don't worry about that. I mean, there was a time in September I was worried about it.

Charlie Rose:This was almost about the time that Lehman Brothers had gone --[talking simultaneously]

John Mack:Yeah, right after that. I mean I think given what was going on in the market and given

what happened with Lehman, and the way things froze up, look. It was a very difficulttime.

Charlie Rose:There is a story in this magazine in which you say you went home and talked to Christy,the woman I introduced you to, and said, this bank -- the firm could fail.

John Mack:Well, first of all, on a brighter side, let me thank you for introducing me to Christy.Thank you.

Charlie Rose:But the point --

John Mack:Listen. I went home. She had come into the city. This is after a conversation withSecretary Paulson, the head of the New York fed, Tim Geithner --

Charlie Rose:And what was that conversation like?

John Mack:The fear of what was going on in the market. The rumors going around, not just aboutus, but about the financial system. And their desire clearly was to have stability in themarkets. And at that time, we had a verbal commitment with the Japanese thatMitsubishi would put a little over $9 billion into our firm. And the point that I made, theJapanese are honorable. They made that statement to me, and I was convinced theywould come through and make that investment. Now, it wasn't until they had their boardmeeting that we would actually know that. That took a little over a week to get that. Butthey did come through, and I was confident about it. So --



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Charlie Rose:Did they send the check over before the board meeting took place?

John Mack:

I wish they did, but they didn't. We -- as a matter of fact, I have a copy of that check inmy office. So between that time, I remember coming home or coming to the apartment inthe city and saying to Christy, you know, there is the chance I could lose this form. Andthen 30 seconds went by and I came back to her and said, but I'd rather be doing this thansitting on the beach in North Carolina reading a book.

Charlie Rose:You'd rather be in the middle of a crisis where you can make decisions and have a role inthe process?

John Mack:

Charlie, it was -- it was an unbelievable time. I mean my team from my presidents, myCFO, my good friend, Tom Knots [spelled phonetically] who is my administrativepartner, my chief legal counsel, Gary Lynch, we lived in that office for three to fourweeks. And weekends, nights, you name it. It was -- to be around a group of people whowere very focused on making sure that we got ourselves in the best position possible anddid it, it's one of the things clearly that is kind of burned into my soul now. And onceyou go through that experience with a group of people -- and I said this to my firm. I saidwhat we have been through, we can never forget. That this has brought us together at atime of crisis. We can only fix it and be better going forward and not forget what we'velearned here. And unfortunately, the country now is going through a crisis. But we'regoing to learn from this, and we're going to come out of it. And I don't know if it's goingto be the end of '09 or the end of 2010, but we will come out.

Charlie Rose:There is no doubt in your mind.

John Mack:There is no doubt in my mind.

Charlie Rose:The country will get past this.

John Mack:Without question. Without question. And look. There are different times in our historywe get wakeup calls. This has been a wakeup call for the Americans. It has been awakeup call, I think, for the rest of the world.

Charlie Rose:A wakeup call to do what?



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John Mack:That global economies, and that's what we live in, the global economic world that we'rein today, cannot be solely managed by the borders of a country. We need to create asystemic risk manager in this country and we need to coordinate with the rest of theworld. We have to work together, because if you go back -- 25 years ago or 30 years ago,

you could say, well, I remember when I first got in the business in 1968, you know, youcame to work at 9:00 in the morning. You took a two hour lunch. The market closed at3:30 and you went home. Today you work 24/7. A market is open around the world 24hours a day. We're involved in all these markets. Those countries are involved in thosemarkets. So we need to create a regulatory environment and a scheme that helps usmanage that process.

Charlie Rose:A global --

John Mack:

A global, absolutely.

Charlie Rose:What would be the institution that could make that?

John Mack:Well, my guess would be that that's something that central banks and --

Charlie Rose:The IMF and everybody else, World Bank --

John Mack:Come to that, sure.

Charlie Rose:All the central banks have to come out to figure out a way to have a measurement of riskaround the world?

John Mack:Well, Charlie, it's a measurement of risk. There is also a measurement or policy of howare we going to regulate risk? How are we going to impose some oversight in the amountof risk that banks are taking, that credit companies are taking, and what are the dynamicsof that market? I mean look. If you look at the hedge fund market, which has been veryactive, and I think long term, has really added a great deal to pension funds and retireesand state funds, et cetera. That was a 2 trillion market. They act independently of eachother, but at the same point, at some level, there needs to be some type of regulatoryoversight.

Charlie Rose:



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But we have a crisis, so therefore, if you look backwards, you say if you had a betterregulatory system, and that can be instructive to what we ought to do in the future.

John Mack:Without question. I'm convinced that people get it. Our regulators understand, and I

think at least in our case being lead by the fed and working with the treasury, there is noquestion in my mind, we will come out with a different regulatory system.

Charlie Rose:But what's more important is people who will be regulated get it, which is what you'resaying, to.

John Mack:Oh, I think they will get it.

Charlie Rose:

Was the Glass -- was the change in Glass Spiegel a good idea or a bad idea?

John Mack:Well, it would be easier for me to say it was a bad idea, but the fact of the matter is, look.We have gone from being basically a U.S. financial industry to a global financial

industry. And I think when you do that, it probably made sense to repeal Glass Spiegel.

Charlie Rose:Bill Clinton says that, too. He does not regret being in favor of repealing Glass Spiegel.

John Mack:But let's understand the issue. You can't ask, in a global economy, you can't ask U.S.banks that you're precluded from the securities business when in other areas of the world,they're not precluded. So if it were not global, it was just the United States, I wouldargue you didn't have to do that. But I think what's lost on -- clearly not the senior groupin leadership, but we are in a global economy. And we have to figure out what is the bestway to ensure that people who are taking risks have regulatory oversight globally.

Charlie Rose:There is no such thing as decoupling.

John Mack:Evidently not.

Charlie Rose:Evidently not. All right. Let me take two ideas that are with us on the front pages of thepaper. One is nationalization.

John Mack:Right.



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Charlie Rose:What does that mean to you, nationalization of banks?

John Mack:

Very simple means to me that government takes over the banks. They own it. 100percent.

Charlie Rose:There is now talk they'll change preferred stock and say they'll own more than 50 percentof Citibank.

John Mack:Right.

Charlie Rose:

That's nationalizing Citibank?

John Mack:I don't think so.

Charlie Rose:Okay, but therefore -- that's really the interesting question. If they own a majority of thestock, but they don't -- nationalization means something in terms of popular conception.On the other hand, what we're talking here is simple seems to be more like an investment

than a government nationalizing a bank and putting its own people in there and running itand sitting on the board of directors and making decisions. Am I right or wrong?

John Mack:I think you're right.

Charlie Rose:So we shouldn't fear this kind of nationalization? Or not?

John Mack:Well, again, let me clear -- I'm not in favor of nationalization, because I'm in favor ofhaving guidelines. I'm in favor of making sure that leverage is kept in the right range.But I think long term, the right answer is to have these financial institutions get the

support and direction of the government, but let those banks work their ways out of theirproblems. I mean if you go and think about what's happened to the market, I guess youcould say that Freddie Mac and Fannie Mae, yes, there was stock in it, but there was a bigpiece of that reported to Congress. They've got in a lot of trouble. I'm not saying it's anyone person's fault or any one group's fault. I just think nationalization to me is not thelong-term answer for this.



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Charlie Rose:What is the short-term answer, though? Is it the short-term answer if in fact you've got toprevent -- if there's some banks that are too big to fail.

John Mack:

Right.

Charlie Rose:-- and you've got to pump money into them to recapitalize them so that they do not fail,whatever you call it, in the short term, it's a good thing.

John Mack:Well, it's a good thing, and it's a better thing when the government puts money into it andwhen these things are turned around, that the government ends up getting their moneyback plus some profit which goes back to the taxpayers. And I believe that will happenand can happen.

Charlie Rose:There is also the question of executive compensation. I'm sure when you went downwith all these other CEOs before the Congress you heard --

John Mack:Sure.

Charlie Rose:-- a lot about that.

John Mack:Well, Charlie, we did. And look, as I said to Chairman Frank's committee, and otherssaid it for one year, I did not take a cash compensation since I've been at MorganStanley. My first year, I took equity. My next year, I did not take a bonus, nor did I takea bonus this past year.

Charlie Rose:So in 2007 or 2008, did you not take a bonus.

John Mack:Yeah, well, look, we are big believers in paying for performance. And if you look at ourstock price, I don't think anyone could say that John Mack performed very well. And as aresult, I didn't get a bonus. Now after having said that, we were profitable in '08. Wewere profitable in '07, but not to the extent and level I thought we should be. So to me,executive comp is something without question that's gotten out of hand. And we need tofix it. And I think that's happening. Again, you know, I don't blame people -- you and Igrew up in North Carolina. People in home towns that you grow up in, or my town ofboresland [spelled phonetically], North Carolina.



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Charlie Rose:Nor adviceville and Henderson.

John Mack:Yeah. They would just shake their heads about this. They don't understand it. I think we

are --

Charlie Rose:They don't understand how much money is being made --

John Mack:Absolutely.

Charlie Rose:-- and why their taxpayers' money is going to rescue people who are making that amountof money and seem to have created the problem.

John Mack:Well, I'll agree with part of that. We will take responsibility for some piece of theproblem. But I don't think you can lay this just on the banks and the investment banks.It's much deeper than that. We are a country of consumers. We don't have a savings rate.Probably [unintelligible] have savings. Now that you see that the saving pool has been insomeone's home, and that's been taken down by 25 or 30 percent, it's created tremendousdistress on families and on individuals. But that idea of bar rowing and using your creditcards and buying a house which you couldn't afford and having a mortgage bank sell youa deal you really didn't understand, it's very complicated. So the blame goes verybroadly. But clearly, Wall Street, the banks, clearly we were part of that. And we wereinvolved without question. And we'll take that.

Charlie Rose:You mentioned the wake-up call. I mean, this has been a real wake-up call.

John Mack:Right.

Charlie Rose:And you mentioned the fact that in China and in Japan, their savings rate's very high.Their consumption rate is much lower. Here, our consumption rate is very high. Oursavings low. Do you expect a reality of this will be the US saving rate will go up? Willthe wake-up call us there?

John Mack:Well, Charlie, clearly in the short run, it will. I mean savings rates are going up now.



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Charlie Rose:Right.

John Mack:People are scared, as they show be, and they're saving money. There's no doubt about

that. I think if you look at pieces of the stimulus package, on the tax credits, some of theother programs to get money into consumer savers hands, there's no question that some ofthat will be saved. All is not going to go into the market to buy whatever people buy.

Charlie Rose:Let me come back to the conversation and this idea. Some argue that you can go too faron restricting compensation in terms of injecting capital or part of the TARP assets,whatever the modus is of doing it. This is from the New York Times on Sunday. "Thebig brains in banking just aren't feeling the love. Up and down Wall Street, financialtypes are grumbling that their industry's highest high flyers are getting their pay cap.Many Wall Streeters say this would be disastrous. The sharpest financial minds will up

and quit, the argument goes, and take their smarts with them at the very moment they'reneeded to reengineer their companies and restart the economy. But is this brain drain realor merely a bit of self-justification and would it really matter much anyway? What sayyou?

John Mack:Charlie, I think at the most senior levels someone like myself or my precedents, I have noissue with any kind of restraints on compensation. And as I said to Chairman Frank, youknow I work for nothing. I love what I do. It turns me on. It's exciting. I work with agreat group of people. But if you go down for the most senior people and you are a 41-year-old or a 38-year-old commodity trader who made $100 million or $70 million foryour firm trading oil commodities and all the sudden you're going to be capped, there arepeople who will hire you. And one of the things that --

Charlie Rose:So you see this every day, people that can go, walk out the door and make a ton moremoney in this environment.

John Mack:I had a hedge fund manager tell me last week, "I can hire anyone on Wall Street from youguys." I've talked to some of my competitors at other firms, that U.S. firms are an easytarget, not just for asset managers, not just for foreign banks, I mean, Joe Ackerman wason the front page of either the Journal or the Financial Times saying if they do this, wewill be able to recruit any talent we want. And I think the best way for the government toget the tarp money back, one way is do not tie our hands and let us lose talent. Nowothers say, well, there's so much talent in the system it will come right up and there's nobig deal. Well, there is a big deal. There's no question that talented people will be able togo to other firms either national firms that are not controlled by a tarp or internationalfirms like Deutsche [spelled phonetically] Bank, what Ackerman said, and get jobs atmultiples of what they made. We have an offer in one of my areas, I'm in the commodity



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areas, with a couple years' contract at double what we paid last year. Now you could saywell, let them go. Well, very talented people and that person is part --[talking simultaneously]

Charlie Rose:

They're part of the solution.

John Mack:Oh, absolutely. Now, can we do things better? Again, absolutely, Charlie. One of thethings that we put in this year is a callback. So over a three-year period when we pay youwe'll pay you X amount in stock and cash that is locked up for three years. If we findyou've done something that's detrimental to the firm, or your positions were not markedcorrectly, or it was a bad position that finally is not closed out into a year or two and welose a lot of money, we have the ability to call that money back. We also have set upwhere we're going to pay people in a combination of stock and cash to try to line up theirinterests with the long term interests of the firm. Now I think those are the things we

need to do. And clearly it's being done. But in this environment there's nothing that wecan do that's going to make my friends and your friends in North Carolina say those guysare not that bad.

Charlie Rose:Or to think -- or being sorry for them either.[talking simultaneously]

John Mack:[inaudible] no one feels sorry for them.

Charlie Rose:All right, there is this, did you for a moment, back to what we said earlier, it's not justMorgan Stanley, it's Goldman Sachs, too --

John Mack:Oh, right.

Charlie Rose:-- the two legends, the two most admired firms on Wall Street could have gone down,could have failed.

John Mack:Right. Charlie, in the financial service business it's all about confidence. And no matterif you'll go back to that period, we had just released our earnings for the third quarterwhich were a little over 16 percent return on equity, great earnings, and the next day ourstock opened down 30 percent. So it's about confidence. And if you break theconfidence in a financial institution you will go out of business.

Charlie Rose:



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You are in a different business today than you were six months ago, a year ago. First ofall, you were a holding company.

John Mack:Right.

Charlie Rose:Secondly, you made a deal to buy Smith Barney. Your risk is different. I assume yourattitude about risking capital is different, yes?

John Mack:Charlie, we're in a risk --

Charlie Rose:How are you different than --

John Mack:Okay, well, look, we're in a risk business. And we will use our balance sheet and we willtake risk. I think what's different is the type of assets we will take a risk on. They haveto be liquid assets. And one of the things we've discovered, and not just Morgan Stanley,we've discovered that some of these assets we've got on our books are not liquid. It'sgoing to take a long time to get out of them. And especially in the securitized market. Itwill take time. So the big change has been two things. Number one, we've reducedleverage. Number two, we take risks in more liquid instruments.

Charlie Rose:Are you different from Goldman? Do you have a different philosophy today?

John Mack:You know, I guess we should get Lloyd and me together.

Charlie Rose:I think that's a very good idea, by the way.

John Mack:We're in the same business. We do the same thing.

Charlie Rose:And are friends. I like Lloyd. They have managed risk, I think by and large extremelywell.

Charlie Rose:In fact, when you came back in 2005, one of the things you wanted to do is look acrossthe street to Goldman Sachs -- tell me if I'm wrong, Goldman Sachs and say we got to bemore like this.



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John Mack:Well, I didn't say that. What I said was we're in a risk business. And if you wanted tokeep your talented people, you have to take more risks. Now, risk is not just buyingassets on your balance sheet. Risk is building out our business in the Middle East.Building out our business in India. Going into Latin America. That's risk also. That's

putting people on the ground, putting money there, and building expense base hopefullythat will generate revenues from that. That's taking risk also. So you need to define riskvery broadly.

Charlie Rose:That where the future is, in fact?

John Mack:Well, look. I think the future, whether we like it or not, is still going to be in taking risk.

Charlie Rose:

Well, I mean emerging markets is what I --

John Mack:Oh, without -- look. There is a lot of business in the merged markets. But no question.When you go to a country that's growing 8 percent or 10 percent a year in GDP growth,

they need the capital markets. That is clearly an area of great opportunity for our firmand others.

Charlie Rose:What misconceptions -- you talk to a lot of people. You went down and appeared beforeCongress and granted, people there had made statements and asked questions with fullunderstanding that they might be seen by their constituents. What misconceptions arethere, from where you sit, about the crisis and how we get out of it?

John Mack:Well, Charlie, look. A number of the questions that were asked were spot on a very goodquestions. Others were more about kind of playing not audience, so -- but again, I thinkwhat we were trying to lay out -- let's take the question of lending. And I think bothVikram and Jamie Diamond and Ken Lewis, who are the big banks, talked about howthey would increase their lending, what they're doing. Let's talk about foreclosures. Ithink the comment was made by the [inaudible], every perspective we get a chance to talkto, gets in trouble, we have been able to work out that we don't foreclose. We, at MorganStanley, have a very small mortgage business and now we are in that same dialogue, thatwe're trying, and actually doing it, getting a repricing. So we're lowering the principleamount. We're lowing the payments to keep people in their homes. So hopefully thatcame across. There is progress being made. I think it's the right thing to do. We need toget stability with people in their homes and making sure that we work with them to solvethe problem. But one of the Congressman said to me that 7,000 homeowners lose theirhouse a day. We need to do what it takes to keep them in their house. One of the things



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that's not talked about, Charlie, is that a lot of the homeowners don't live in the house.They speculate --

Charlie Rose:Speculators.

John Mack:They got a mortgage, very low money down, the market kept going up, I'll play it thisway. Those individuals clearly will have a more difficult time, I think, in foreclosure.

Charlie Rose:I want to come back -- this is important for me to try to understand. When we getthrough this, whether it's 2010 or whenever it is, and you and lots of other people I knowbelieve that will, in fact, happen. I think the president believes that. I think BarneyFranks believe that. I think Jamie Dodd believes that, [unintelligible] and you and lots ofother people. When we get through this, what will be different? Beyond the need for

some kind of global regulation? What else? How will the system be different? How willfinancial structure be different?

John Mack:Well, Charlie, it's clear, if you go back -- go back in the year of '08, Bear Stearns is nolonger in business. Lehman Brothers is no longer in business. Merrill Lynch is part ofBank of America. The two remaining investment banks are bank holding companies. Sothat's a huge change. Number one. Number two, I think we're going to be bigger. I thinkwe're going to have more equity capital long term. I think we're going to have a strongerbalance sheet than we've had, and clearly, we're going to have less leverage. And be it abank holding company with the direction of the fed without question some of thebusinesses that we have been in the past are going to be curtailed. I'm not exactly sure ifit's private equity or the real estate business or whatever it may be, but they will bewithout question, for some period of time, could be 10 years, could be 20 years, could beforever. There is going to be more regulatory oversight. That is going to be a bigdifference. Today, some of the decisions that we make and we want to implement, wewill not take the next step until we talk to our regulator. They need to see what we'regoing to do before we do it. That's a huge change.

Charlie Rose:There is also the question of looking at decisions you have made during this thing. AndI'm amazed at this. There are being -- books are being written about this. They will lookat options -- for example, you talked to Merrill Lynch. You passed, because they want tomake a deal faster than you were prepared to do without the due diligence and talking toyour board. And when you look at that, do you think, God, I missed a bullet?

John Mack:Charlie, it was just -- you know, again --

Charlie Rose:



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It hasn't turned out exactly the thought it would be at Bank of America.

John Mack:I don't want to comment on that. For Morgan Stanley, when we talked to John and histeam --

Charlie Rose:John Thain.

John Mack:Thain. They just wanted to move more quickly than we were willing --

Charlie Rose:Because they knew they had to.

John Mack:

I don't know that. They didn't say that to me. But clearly, they had to do something. Wewere just not prepared to move that quickly. We just wouldn't do it.

Charlie Rose:Second decision by -- you had the vice chairman of the Chinese sovereign funds come into see you.

John Mack:Yes.

Charlie Rose:Did me pass on injecting more capital into Morgan Stanley?

John Mack:It became a function of price and structure. You know, as you know, back in a year ago,it would be the end of '07, they did make an investment in Morgan Stanley. And --

Charlie Rose:He, by the way, sits on the board of trustees at Duke University.

John Mack:He does. Yeah. [Unintelligibl] he does. We just couldn't come to terms. We bothnegotiated in good faith and tried to come to terms, but in the interim, we got a call fromour Tokyo office saying that Mitsubishi has a lot of interest in doing this deal structure,and that's have we engaged with. At the same time, we still wanted the Chinese, the SECto invest with us. We have a good relationship with them. Chairman Lau [spelledphonetically] was just in town last week.

Charlie Rose:Right.



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John Mack:But we just couldn't come to terms --

Charlie Rose:

He's happy with his investment?

John Mack:He's happier since the stock market --

Charlie Rose:For a moment he was worried? And had you renegotiate, did he?

John Mack:No, he didn't. There was no renegotiating.

Charlie Rose:Okay. Did you get help from treasury, and, you know -- I'm talking now about theattitude of Paulson, at that time, Paulson and Bernanke and Geithner, at the New Yorkfed, who were really out there trying to help encourage the Japanese to do this, and doingthat in many different ways.

John Mack:Right. Charlie, without question, we got help with the Japanese in other ways. Also youneed to understand, there were a couple of things going on at one time. I think SecretaryPaulson and Chairman Bernanke at the time, Tim Geithner, they had a lot of things toworry about. Number one worry should have been the system, and financial stability.Not worried about -- they were concerned about Morgan Stanley. They were concernedabout Goldman Sachs. They were concerned about other banks, but their number onefocus had to be what's right for the system. If a casualty came out of that, then so be it.My focus was my firm --

Charlie Rose:And you might have been a casualty.

John Mack:Possibly. My focus was my shareholders and my employees. And that's what I focusedon. Now, we didn't disagree. There was cajoling and things to do, and not to do. Butthey were focused on the right things. And I think the team at Morgan Stanley wasfocused on the right things. And the team at Goldman Sachs were focused on the rightthings.

Charlie Rose:And in the end, that process worked.

John Mack:



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It worked.

Charlie Rose:Let me just hear you, because they have gotten, across the board, not so muchBernanke.And Paulson got a significant amount of criticism because he was in uncharted

waters and people were saying, you know, -- they didn't seem to know exactly what todo. And they tried this thing first, you know, first TARP program, and that got a lot ofcriticism. Then they said, let's recapitalize banks. Now they're back talking about onething or the other. And now it's in Geithner's hands, and he's deciding what to do withthe second 350 billion of the TARP program.

John Mack:Right.

Charlie Rose:But John Mack is here to say I look at what their mandate was, previous administration,

this administration. And I don't have any fault with them. I think they are severing thecountry and doing the best they know how.

John Mack:Charlie, absolutely right. I mean, look, hindsight is great. We didn't know -- no oneknew where this was going. Now, I'm sure there are five investors somewhere that knewexactly where this was going, but I don't know who they are. But someone out there saysI could have told you that.

Charlie Rose:Well, they're very rich today.

John Mack:If they actually took the risk.

Charlie Rose:Right, if they took the risk.

John Mack:But Secretary Paulson and Chairman Bernanke. They didn't know the extent of this.They were acting on information that they had and using their experience to make thesedecisions. This is uncharted waters. No one's gone down this river before. So we'relearning. We're making adjustments just like any strategy. You know, I said earlier inthe interview, this is an economic war. In war, you can come out with the best battle planthat you can possibly put on paper with your generals, and you start into battle. And allthey say, you know, that's the wrong attack. We need to go over here and flank them.We made a mistake. And I think, you know, for those gentlemen -- and they're patriots.What you think about what they do and how difficult their job is. I have nothing butrespect for them, and I don't know anyone that could say I have the answer. We can do it



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this way. It's just not out there.

Charlie Rose:You haven't met that person yet.

John Mack:No.

Charlie Rose:And President Obama?

John Mack:I think, again, it's been a short period of time. He has taken this up to the level it shouldbe. It's top priority. He's very focused on it. And I have to give him higher marks.Now, some people say, well, he's got to be, you know, more specific. It's hard to bespecific. We've got to work through it. And I think the key is clarity. People need to

understand what we're doing. And look, is it tough? Is it a bad time now? The answer isyes. But we're going to come out of this. And it is going to take a lot of kind of workand tough negotiations, but we will come out of this.

Charlie Rose:My impression is lots of people are talking that you talked to your competitors that[unintelligible] about this. Am I right or wrong about that?

John Mack:We talk about it a fair amount, yes.

Charlie Rose:Just, what's the conversation?

John Mack:Well, the most recent one has been, you know, we were all down in Washington, just that-- one of the things that we feel, look, New Yorkers, Wall Streeters are not, you know,the most favored people around here. Someone described us as the [unintelligible]tobacco industry. So we talk about that. We talk about what do we need to do in themortgage markets? How are we going to help people?

Charlie Rose:How do we build something better?

John Mack:Yeah, we have to. And we talk about that a great deal. And how do we get the messageout there that these markets will open up, and we will be able to get this company, ourcountry moving again.



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Charlie Rose:This is asking you to be a little bit self-congratulatory. But what is the best thing youfound out about yourself in this crisis? That A, you could keep a sense of humor in theworst of times, say? Or what?

John Mack:Charlie, that's a great question. I've learned that I love the action. I've learned that thepeople who work for me are very important to me. And I've learned that at the end of theday, no matter what's at stake, you have to do what your heart tells you to do.

Charlie Rose:As a friend of yours once said, and I love this, To be wrong is unfortunate. Not to make adecision is unforgivable. And therefore, in making decisions, you don't always know theanswer. You do what you think is best. Thank you for coming.

John Mack:

Thank you, Charlie.

Charlie Rose:John Mack, CEO and chairman of Morgan Stanley and a great friend of mine. I thankhim for the hour. And I thank you. We'll see you tomorrow night live after thepresident's speech to Congress. See you then.

Transcript of Charlie Rose's Interview With John J. Mack

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Transcript of Transcript of Charlie Rose's Interview With John J. Mack