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Morgan Stanley's Mack: Reform Of Financial System Is Needed

The government has lost momentum on reforming financial regulation and needs better controls to prevent a potential collapse of the financial system, outgoing Morgan Stanley CEO John Mack told CNBC Friday.

John Mack
cnbc.com
John Mack

"I'm somewhat disappointed that we've lost a little of the steam about getting financial reform. We do need system-risk management," Mack said in a live interview.

"It's not as simple as (Wall Street) having too much risk," he added. "Credit was free and you were paid to take risk. What we've learned is that firms at 30 and 40 times leverage is a mistake. Our risk management systems have to be more robust and thorough."

Morgan Stanley announced Thursday that Mack is stepping down as CEO, capping a turbulent year for the big investment bank and the rest of Wall Street. Mack will be succeeded by James Gorman, one of the investment bank's co-presidents

Mack, 64 years old, will remain chairman of Morgan Stanley. The management changes will take effect on January 1, 2010.

When asked whether government officials like Henry Paulson and Timothy Geithner understood the impact the collapse of Lehman Brothers a year ago might have on the financial system, Mack was skeptical.

(Watch video for full interview with Mack)

"I don't think they did," said Mack. "Things were moving so fast, and there's no playback that's been written for what happened. I do think that if they had known, things would have turned out differently."

Mack told the board 18 months ago he wanted to step back from the CEO role when he turns 65 in November. Mack has led Morgan Stanley for four years. He told CNBC that there was no tension with the board that caused him to step down.

"We'd been talking about this [stepping down as CEO] for a long time," Mack said. "When it was clear that James Gorman was the right person [to take over] there was no reason to wait." Mack said Gorman will help grow Morgan Stanley's core institutional business. "We are building that up and James realizes that," Mack said. "Our business model hasn't changed. We are still taking risk, this is a risk business."

James Gorman
James Gorman

Gorman, 51, who runs Morgan Stanley's brokerage and has been overseeing its expansion through a joint venture with Citigroup's Smith Barney unit, has long been seen as a front runner for the top job at Morgan Stanley.

Prior to joining Morgan Stanley in 2006, Gorman had held a series of positions at Merrill Lynch, including leading its global private client business from 2001 to 2005.

Investors welcomed the apparently smooth transition in leadership. Morgan Stanley shares rose 49 cents to $29.13 in afternoon trading.

When asked what he planned to do after leaving the CEO position, Mack said he would still be helping out the firm. "I'm not going to retire," Mack told CNBC. "I'm here as chairman and I love talking to people. I'll be helping out James whenever he needs me."

Mack also said he wanted to be remembered as bringing Morgan Stanley through a terrible crisis. "The firm's legacy is more important than mine," said Mack.

While Mack was popular with many within Morgan Stanley, many investors had grown restless with his management, which saw the bank embrace risk in the months preceding the credit crisis that shook Wall Street last year.

Morgan Stanley's shares have come back this year after it fought for survival in the wake of the Lehman Brothers collapse, helped by the U.S. government and an investment from Japanese bank Mitsubishi UFJ that Mack took the lead in negotiating.

More recently, the bank was lambasted by some on Wall Street for retreating from risk after the worst of the crisis blew over. At the same time, rivals like Goldman and JPMorgan Chase seized trading opportunities.

Morgan Stanley is widely expected to eventually purchase the remaining 49 percent stake in Morgan Stanley Smith Barney, as the joint venture with Citigroup is known, as it further invests in the retail brokerage business.

—Reuters and AP contributed to this story.

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