Morgan's Mack: Firm Was Excessively Leveraged

Morgan Stanley Chief Executive John Mack said the current financial crisis is like nothing he's ever seen before, and it will take time for firms to deleverage from the excessive levels financial firms had reached.

Morgan Stanley and its competitors "all have to take some blame for that," he said, in an interview on CNBC. (To listen to the entire interview, watch the attached video.)

One year ago, Morgan Stanley ran leverage at some 30-times, Mack said. This means for every dollar of capital the firm had, it carried some $30 in debt. Morgan currently sits at "slightly below 20-times leverage," he said. With the $9 billion investment from Mitsubshi UFJ Financial Group and future federal aide, Mack expects leverage to fall into the teens.

Mack indicated he now questions whether it was wise to maintain such a high leverage ratio, and he noted that other financial institutions abroad had leverage ratios of as much as 40 or more.

"We're all learning that leverage works both ways," Mack said.

This is one factor that is making the current financial crisis different from prior shocks to the market.

According to Mack, some of the distinguishing factors in this crisis are its global nature, the fact that credit has dried up, and the volatility in the market.

"The number of funds that are in the market, the volatility in the market has been exacerbated by a combination of very active managers, derivatives and too much leverage in the system," he said.

Mack also said that it may take continued international coordination to fully unlock the credit markets and resolve the financial crisis, perhaps even by forming a new global body to oversee the process.

"Morgan Stanley, as others, we're doing business all over the world and it's pretty difficult to say I'll work under one set of rules under one country and a different set somewhere else," he said.

U.S. Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke have taken the right steps to restore confidence in the banks, Mack said.

"For these banks [like Morgan Stanley] to be capitalized that well, they're not going to go out and play big casino with that money," he said. "This is not going to be chips on the table for the kind of — roll it out one more time and see how people do; this is about bringing stability back into the system."

Mack said the Lehman Brothers' bankruptcy one month ago contributed to the locking of the credit markets.

"A lot of that has locked up the system, but that will take some time," he said.

Separately, Mack said he expected the U.S. and global economy are in a recession now, and he wouldn't be surprised if it lasted until 2010.

"We're in for a rocky road for a while," Mack said. "A month ago, if oil prices moved down we'd think it was a bullish sign and you would have had the equity markets respond in a positive way. Today, with oil prices down people are saying 'you know it's not bullish, it shows there is a worldwide recession.'"