Bankers on Wall Street need to be “a little paranoid and a little scarred” from the last crisis, according to James Gorman, Morgan Stanley chief executive, who has warned that rising profits and a strong economy should represent “the most scary time” for the industry.
Shares in the big banks have more than quintupled since March 2009, boosted latterly by higher interest rates and lower taxes, while multibillion-dollar settlements with regulators are also mostly in the rear-view mirror.
But Wall Street cannot afford to let its guard drop against some of the behavioural excesses that fed the Lehman crisis, said Mr Gorman on Monday morning, during a conference in New York. After a few good years the “tyranny of success” can set in, he said, when lessons learned from setbacks get forgotten.
Banks looked more solid a decade on from the Lehman meltdown, he noted, with more resilient balance sheets and with good tailwinds from economic growth. But “that is actually the most scary time”, said Mr Gorman. “It really helps to be a little paranoid and a little scarred . . . Forget about what the regulators want, what the public want, what the politicians want; we don’t want [another crisis].”
Mr Gorman was part of a panel of speakers at a culture-themed conference at the New York Federal Reserve, held on the first day of the new president, John Williams. Also on the panel was Bill Dudley, the outgoing New York Fed president, who reiterated a call for tighter restrictions on bonuses that have, in many cases, recaptured pre-crisis levels.
Part of the 2010 Dodd-Frank Act called for agencies to draw up rules on incentive pay that could discourage excessive risk-taking at regulated companies, and even set a hard deadline — nine months after the passage of the bill. But the previous administration did not get round to completing the project, and the new set of appointees under President Donald Trump has said very little about reviving it.
Greater use of deferrals of pay would address “the root causes of misconduct”, Mr Dudley said, while “better aligning the interests of senior leaders with creditors and shareholders”.
Morgan Stanley is on course to generate an 11.7 per cent return on equity this year, according to analysts’ forecasts tallied by Bloomberg, which would mark its best return since the 23 per cent obtained in 2006, on a much thinner capital base. Mr Gorman, who has run the bank since 2010, has won plaudits for cutting its troubled fixed-income unit down to size, while pushing into areas with steadier revenues such as wealth and asset management.
The chief executive and chairman suggested that one way of keeping a lid on potential risks was to focus on issues that could cost the bank half of one per cent of capital, through losses or subsequent penalties for misconduct. In the case of Mr Gorman, who said he was ultimately responsible for a consolidated balance sheet with about $70bn of shareholders’ equity, that is $350m. Managers running constituent parts of the business should have progressively lower thresholds for concern, he said, to ensure that “everyone owns a piece of the problem”.
But he added he was conscious of “grade creep”, or grade inflation, when people newer to the business of banking develop a false sense of security.
“My fear is . . . those people who haven’t been through the last 10 plus years . . . the crisis, the post-crisis, the [London] Whale, all the other stuff that has happened since,” he said. “Fifteen years from now, will management come to work every day with sufficient scarring or not?”