Morgan Stanley chair thinks proposed bank rules will be 'wound back'

New banking rules proposed last year by US regulators were “extremely aggressive” and are likely to be “materially wound back” before being put in place, Morgan Stanley Chairman James Gorman said.

“They’ll definitely change,” Gorman said in a Bloomberg Television interview Wednesday, noting that regulators have received thousands of comments about the proposed rules. “It was a proposal that I would say was extremely aggressive and set a marker. It will not go through in that form. If it did, I think it would have very, very negative consequences for corporate lending across this country, which is not what you want. It’s not going to help the economy grow.”

The financial world has been in a heated debate over the U.S. proposals tied to what’s called the Basel III Endgame — an international overhaul initiated more than a decade ago in response to the financial crisis of 2008. If approved by U.S. watchdogs, the rules would require big banks to increase their capital cushion by almost 20% to ensure they can survive another crunch.

The Federal Reserve and other regulators say the changes can help avoid turmoil such as last year’s meltdowns of midsize banks. But bankers have been increasingly vociferous in their arguments against the proposals, saying they are unnecessary and will drive up interest rates for first-time homebuyers as well as underserved and low-to-moderate-income borrowers. They also say the plans will push riskier lending further outside regulator purview.

“What was put out is highly, highly, highly unlikely to be what is ultimately regulated,” Gorman said. “I think this is a highly aggressive proposal that will be materially wound back when it finally becomes law or regulation.”

Gorman announced in May he would be stepping down as CEO, touching off a race among top executives to succeed him. In October, Morgan Stanley selected Ted Pick to succeed Gorman after a 14-year run that reshaped the Wall Street bank. Pick became CEO this month, with Gorman, 65, staying on as executive chairman.

The Australian-born Gorman, once a surprise choice for CEO, rescued Morgan Stanley from near collapse in the wake of the 2008 financial crisis and engineered a multiyear transformation with wealth management at its core. That strategic overhaul was accelerated by two signature deals announced in 2020, turning the firm into a money-management powerhouse barreling toward a $10 trillion goal, and catapulting its market value above that of archrival Goldman Sachs Group Inc.

In a rare setup, the two men who missed out on the CEO job agreed to remain at New York-based Morgan Stanley, with Co-President Andy Saperstein gaining oversight of asset management in addition to his role leading wealth management, and Dan Simkowitz replacing Pick as co-president leading the investment-banking and trading division.

In October, Morgan Stanley granted special bonuses worth $20 million each to Pick and his two deputies. The board’s succession committee “determined that granting the awards to each of our incoming chief executive officer and co-presidents is in the best interests of the company and its shareholders as the company transitions from 14 years of exceptional leadership by Mr. Gorman,” Morgan Stanley said at the time.

INTEREST RATES

In the wide-ranging interview Wednesday, Gorman said the Federal Reserve has done a good job managing interest rates, which he expects to decline this year. The US economy is “doing fine” and a recession is “unlikely,” he said. 

“Rates will come down,” Gorman said. “Inflation has moved down pretty materially quickly that it’s now become more likely. So first half of the year I suspect nothing, back half of of the year they could move a couple of times.”

He also touched on Morgan Stanley’s growth plans for Asia, saying its wealth business there is “smallish” but growing fast. 

On China specifically, Gorman said that the world’s second-largest economy is “a key factor in global economic health” but has some “fundamental challenges,” including demographics. Because of the country’s decades-long one-child policy, “right when you need more productive working people coming through to support the older generation, they’ve got fewer of them, and they don’t have good immigration.”