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CNBC Exclusive: CNBC Transcript: Morgan Stanley Chairman and CEO James Gorman Speaks with CNBC's Mary Thompson on "Squawk on the Street" Today

Friday, 18 Oct 2013 | 1:05 PM ET

WHEN: TODAY, FRIDAY, OCTOBER 18TH

WHERE: CNBC'S "SQUAWK ON THE STREET"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Morgan Stanley Chairman & CEO James Gorman. Following is a link to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000209228.

All references must be sourced to CNBC.

MARY THOMPSON: WE'RE SITTING HERE WITH JAMES GORMAN, CEO OF MORGAN STANLEY. A VERY GOOD QUARTER FOR YOU. WHY DON'T YOU TELL US WHAT YOUR PERSONAL HIGHLIGHTS WERE THIS QUARTER.

JAMES GORMAN: FIRSTLY, THANKS FOR DOING THIS, MARY. IT'S GREAT TO BE BACK ON CNBC. YOU KNOW, FOR ME, THE LONG-TERM STRATEGY IS WHAT REALLY MATTERS. IT WAS A GREAT QUARTER AND WE CAN TALK ABOUT SOME OF THE BITS OF IT. BUT THE LONG-TERM STRATEGY, THE RESILIENCE, THE DURABILITY, THE CONSISTENCY, ALL OF THE THINGS THAT WE HAVE BEEN TRYING TO PUT IN PLACE FOR THE LAST FIVE YEARS, SINCE THE CRISIS, THEY'VE STARTED TO COME THROUGH.

THOMPSON: LET'S TALK ABOUT A COUPLE OF THE BIDS. ONE OF THEM, OF COURSE, YOU JUST GOT OFF THE CONFERENCE CALL, A LOT OF QUESTIONS ABOUT FIXED INCOME. REVENUE YEAR-OVER-YEAR DOWN 44%. NOW YOU DO HAVE A TARGET R.O.E. ON THIS AND THERE ARE A COUPLE OF WAYS YOU CAN REACH THIS GIVEN THAT YOUR REVENUES ARE A LITTLE BIT LOWER. YOU CAN CUT COMPENSATION. YOU CAN REDUCE RISK WEIGHTED ASSETS, OR YOU CAN INCREASE RISK. WHAT ARE WE GOING TO SEE FROM YOU GUYS TO ACHIEVE THAT R.O.E. TARGET?

GORMAN: WELL, I'D ADD ONE FOURTH THING, WHICH IS YOU CAN INCREASE FLOW BUSINESS WITH CLIENTS, WHICH ISN'T NECESSARILY INCREASING RISK. I THINK WE'RE DOING A LITTLE BIT OF ALL OF THOSE. I MEAN, WE ARE CUTTING RISK-WEIGHTED ASSETS, SO IT'S A LESS BALANCE SHEET, CAPITAL-INTENSIVE BUSINESS. WE'RE INCREASING FLOW WITH OUR CORE CLIENTS. BUT THE BUSINESS IS IN A MULTI-YEAR TURNAROUND AND WE'VE SAID THAT WE'RE NOT GOING TO GET THERE IN ONE QUARTER OR TWO QUARTERS. WHAT I'D LIKE TO SEE IS PROGRESS. WE HAVE A GREAT MANAGEMENT TEAM, THEY HAVE A VERY CLEARLY ARTICULATED STRATEGY. AND WE'RE REDUCING THE RISK IN THE BALANCE SHEET BY BRINGING DOWN THE RISK-WEIGHTED ASSETS. NOW WE ARE BUILDING THE REVENUES. IT IS GOING TO TAKE SOME TIME.

THOMPSON: MULTIYEAR TURNAROUND, WHAT INNING ARE WE IN RIGHT NOW?

GORMAN: OH BOY. WE'RE STILL IN THE REASONABLY EARLY INNINGS. I MEAN GIVEN HONESTLY WHERE OUR REVENUES WERE. BUT IT'S GOT TO BE PUT IN THE CONTEXT OF EVERYTHING ELSE GOING ON AT THE FIRM. SO WITH A LOOK AT THE EQUITIES BUSINESS, SALES IN TRADING EQUITIES, HAD JUST A TERRIFIC QUARTER. 1.7 BILLION IN REVENUE. I THINK IT WILL BE NUMBER ONE, MAYBE IT WILL BE NUMBER TWO, BUT I THINK IT WILL BE NUMBER ONE IN THE WORLD. AND THAT STABILITY THAT WE BRING TO OVERALL SALES AND TRADING GIVES US THE TIME WE NEED TO MAKE THIS TURNAROUND IN FIXED INCOME.

THOMPSON: LET'S TALK ABOUT EXPENSES BECAUSE YOU SAY YOU'RE STILL ON TRACK – TOOK OUT 1.6 BILLION IN EXPENSES – HOWEVER WE DID SEE INCREASES – THAT IS EX LITIGATION EXPENSES, WHICH CONTINUE TO GO UP QUARTER-OVER-QUARTER. WHAT ARE YOU RESERVING FOR? WHAT'S BEHIND THAT?

GORMAN: WELL, YOU KNOW, LIKE ALL OF THE FIRMS, WE'VE GOT A RAFT OF LITIGATION OUT THERE – POTENTIAL LITIGATION, AND WE HAVE TO TAKE APPROPRIATE RESERVES FOR IT --

THOMPSON: MORTGAGES? COMMODITIES?

GORMAN: WELL, OURS TEND TO BE LESS ON THE CONSUMER SIDE. WE HAD A SMALL MORTGAGE SERVICING BUSINESS, SAXON. I THINK WE WERE THE 15THLARGEST IN THE COUNTRY, SO WE'RE SMALLER ON THAT – SMALLER ON ALL OF THE FORECLOSURE ACTIVITY. OURS IS MORE AROUND THE KINDS OF PRODUCTS THAT WERE SOLD DURING THE CRISIS AND SO ON. BUT WE'RE WORKING THROUGH THAT. I THINK WE PRUDENTLY RESERVED, AS RUTH SAID ON THE CALL, IT'S AT AN ELEVATED LEVEL NOW, $200 TO $300 MILLION ABOVE WHAT WE THINK OF AS A NATURAL RUN RATE. AND THAT'S FINE. WE'LL WORK THROUGH THIS.

THOMPSON: HOW LONG ARE WE GOING TO SEE THESE ELEVATED LEVELS?

GORMAN: TOUGH TO PREDICT, BUT I'D SAY IT WILL CONTINUE FOR A LITTLE WHILE. AND YOU KNOW, WE'RE –THE WHOLE STREET IS GOING THROUGH THIS LITIGATION MISH-MASH OF ACTIVITY. YOU KNOW, BUT WE'RE COMFORTABLE WITH WHERE IT IS OBVIOUSLY, WE CAN ABSORB IT GIVEN OUR CURRENT REVENUE RUN RATE, WHICH IS THE IMPORTANT THING. AND WE WILL GET TO THE END OF THIS.

THOMPSON: ONE OTHER THING THAT HELPED YOU THIS QUARTER IS YOU HAD A MUCH LOWER TAX RATE. IT WAS 25%, I THINK COMPARED TO 35% LAST YEAR. WILL WE SEE A SIMILAR TAX RATE IN THE FOURTH QUARTER, OR IS IT GOING TO GO UP?

GORMAN: WELL I HOPE 35% IS NOT THE RUN RATE FOR OUR TAXES. I THINK OF MORE AROUND 30%, PARTICULARLY AS WE HAVE A U.S.-CENTRIC BUSINESS WEALTH MANAGEMENT, WHICH IS PREDOMINANTLY U.S. THERE ARE A COUPLE OF CENT ADJUSTMENTS. I THINK IT WAS ABOUT 3 CENTS BASED UPON SOME REPATRIATIONS OF FOREIGN TAXES. BUT YOU KNOW, THAT MOVES PLUS OR MINUS A COUPLE OF CENTS EVERY QUARTER. BUT I WOULD TARGET GENERALLY ABOUT A 30% TAX RATE, FOR OUR BUSINESS MIX AS IT IS TODAY.

THOMPSON: ON THE CALL, YOUR CFO, RUTH PORAT, TALKED ABOUT THE IMPASSE THAT WE SAW IN D.C., OVER THE LAST COUPLE OF WEEKS. WAS A TAX ON BUSINESS. NOW, WE HAVE THIS KIND OF TEMPORARY WINDOW, WHERE WE SEE -- WE HOPE CONGRESS WILL COME TO SOME KIND OF AGREEMENT, AND THE WHITE HOUSE. WHAT WOULD YOU LIKE TO SEE OUT OF D.C. OVER THE NEXT THREE MONTHS? IF YOU HAD A WISH LIST IN THAT LONG-TERM SOLUTION, GIVE ME TWO THINGS YOU'D LIKE TO SEE.

GORMAN: BOTH SIDES START TALKING TODAY RATHER THAN FEBRUARY 6TH, OR WHATEVER THE DATE IS BEFORE THE FINAL NEXT DATE. SO WE START THESE DISCUSSIONS, WE START BEHAVING AS THOUGH WE'RE TRYING TO DO WHAT'S RIGHT FOR THE COUNTRY. NOT WHAT'S RIGHT FOR INDIVIDUAL POLITICAL PARTIES. WE NEED TO COME TOGETHER. WE'VE BEEN TRYING TO COME TOGETHER FOR A COUPLE OF YEARS TO DEAL WITH THE FUNDAMENTAL PROBLEM, WHICH IS WE SPEND MORE THAN WE TAKE IN. AND AS A RESULT OF THAT PROBLEM, OBVIOUSLY, WE'RE INCURRING DEBT, WHICH IS WHY THE DEBT CEILING HAS TO GO UP. THEY'RE SEPARATE ISSUES. WE NEED TO START TALKING IMMEDIATELY.

THOMPSON: BEYOND TALKING, IS THERE ANYTHING ELSE YOU FEEL IS CRITICAL? IS IT TAX REFORM? ENTITLEMENT REDUCTIONS? WHAT IS IT THAT YOU WOULD LIKE TO SEE AS PART OF THE LONG-TERM SOLUTION?

GORMAN: IT'S GOT TO BE A BALANCED SOLUTION. IT'S BOTH SIDES. YOU AREN'T GOING TO SOLVE THIS PROBLEM BY JUST INCREASING TAXES. YOU'RE NOT GOING TO SOLVE THE PROBLEM BY JUST REDUCING ENTITLEMENTS. IT'S A COMPREHENSIVE RELOOK AT THE BALANCE SHEET OF THE COUNTRY, THE AMOUNT OF MONEY THAT WE'RE SPENDING OVERALL, AND WHAT IT'S DOING TO OUR INCOME VERSUS OUR EXPENSES. YOU DO IT – IF YOU'RE RUNNING A BUSINESS, THAT'S HOW YOU DO IT.

THOMPSON: CONGRESS AT THIS POINT HAS A VERY LOW APPROVAL RATING, I THINK SOMETHING THE BANKS MIGHT ACTUALLY FIND AS SOMEWHAT OF A RELIEF, TAKES THE SPOTLIGHT OFF OF THEM. BUT MY QUESTION IS, HOW ABOUT THE MONEY THAT MORGAN STANLEY HAS SPENT, BACKING SOME OF THESE PEOPLE IN CONGRESS. DO YOU FEEL YOU HAVE YOUR MONEY WORTH, OR ARE YOU RETHINKING HOW YOU SPEND IT WATCHING THE SHENANIGANS THAT HAPPENED DOWN IN WASHINGTON?

GORMAN: I THINK ALL OF THE BUSINESS COMMUNITY – IN FACT BECAUSE OF THE APPROVAL RATING, ALL CONSUMERS, ALL CITIZENS, HAVE BEEN DISAPPOINTED. CONGRESS HASN'T DONE WHAT IT'S SUPPOSED TO HAVE DONE. WE'RE LOOKING FORWARD TO NOW PEOPLE GETTING SERIOUS AND DEALING WITH THE REAL PROBLEM.

THOMPSON: BUT IT GOES BACK TO THE QUESTION, DO YOU FEEL YOU GOT YOUR MONEY'S WORTH, OR ARE YOU GOING TO RETHINK HOW YOU SPEND IT?

GORMAN: WELL SO FAR, WE HAVEN'T GOT OUR MONEY'S WORTH. WE HAVEN'T GOT BACK TO A SITUATION WHERE WE'RE FOCUSED ON GROWING THE ECONOMY. WHICH IS WHAT THE CONVERSATION IN THE CAPITOL SHOULD BE ABOUT.

THOMPSON: I HAVE TO ASK YOU. WHAT ARE YOUR CLIENTS SAYING? ARE THEY ANGRY? ARE THEY FRUSTRATED? HAVE THEY JUST THROWN THEIR HANDS UP?

GORMAN: I THINK FORGET WHETHER IT IS OUR CLIENTS, IT'S ANYBODY. TALK TO ANYBODY ON THE STREET. I'VE BEEN WATCHING THESE INTERVIEWS ON THE STREET. EVERYBODY IS FRUSTRATED. AMERICA IS THE LEADING COUNTRY IN THE WORLD. IT'S THE LEADING ECONOMY IN THE WORLD. IT'S BEEN THE LEADER ON SO MANY ISSUES. IT'S TIME WE STARTED ACTING AS LEADERS.

THOMPSON: HOW DOES IT AFFECT YOUR BUSINESS? RUTH SAID IT WASN'T GOING TO AFFECT FOURTH QUARTER M&A, BUT WHAT ABOUT 2014?

GORMAN: WELL IT'S TOO EARLY TO PREDICT. IF WE GET A COMPREHENSIVE SOLUTION, IF CONGRESS CAN WORK TOWARDS THAT, THEN I THINK THE ECONOMY IS FREE TO DO WHAT IT'S SUPPOSED TO BE DOING WHICH IS GROWING. THE U.S. ECONOMY IS IN GOOD, FUNDAMENTAL SHAPE.

THOMPSON: ONE LAST QUESTION.

GORMAN: SURE.

THOMPSON: TELL US HOW YOUR RETAIL INVESTORS ARE RESPONDING? BECAUSE YOU HAVE THIS WONDERFUL WINDOW ON THE RETAIL INVESTOR. YOU ACTUALLY SAID THEY HUNG IN THERE IN THE THIRD QUARTER.

GORMAN: WELL, THE RETAIL INVESTORS HAVEN'T PULLED MONEY OUT OF THE MARKETS. THEY'VE BEEN LESS ACTIVE, BECAUSE THERE HASN'T BEEN AS MUCH CONFIDENCE, BUT THEY HAVEN'T PULLED IT OUT. SO IT'S POISED FOR GROWTH. I WILL SAY WE WERE JUST THRILLED WITH THE PERFORMANCE OF THE RETAIL BUSINESS. IT'S COMING ALONG EXACTLY AS WE HOPED IT WOULD. THE PLAN TO CREATE STABILITY AND BALANCE FOR OUR ORGANIZATION IS WORKING, AND A CREDIT TO ALL OF OUR FINANCIAL ADVISORS OUT THERE FOR THE JOB THEY'RE DOING FOR THEIR CLIENTS.

THOMPSON: JAMES, THANK YOU VERY MUCH FOR JOINING US TODAY. WE APPRECIATE IT.

GORMAN: THANK YOU. GREAT TO BE HERE.

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