WHEN: TODAY, THURSDAY, MAY 31ST AT 4PM ET
WHERE: CNBC’S “CLOSING BELL WITH MARIA BARTIROMO”
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Morgan Stanley Chairman & CEO James Gorman today on CNBC’s “Closing Bell with Maria Bartiromo” at 4PM ET. All references must be sourced to CNBC.
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BARTIROMO: WELCOME BACK TO MORGAN STANLEY'S TRADING FLOOR. THE BIG NEWS HERE, OF COURSE, THE FACEBOOK FALLOUT. MORGAN STANLEY WAS THE LEAD UNDERWRITER OF THE IPO WHICH WAS ORIGINALLY PRICED TWO WEEKS AGO AT $38 A SHARE. THE STOCK DOWN MORE THAN $8 SINCE TRADING BEGAN. AS YOU SEE, JOINING ME NOW EXCLUSIVELY IS MORGAN STANLEY CEO AND CHAIRMAN JAMES GORMAN AND WE'LL TALK ABOUT FACEBOOK IN A MOMENT. GOOD TO HAVE YOU ON THE PROGRAM. THANK YOU FOR JOINING US.
GORMAN: GOOD TO BE BACK WHO KNEW WE WOULD HAVE SO MUCH TO TALK ABOUT TODAY.
BARTIROMO: EXACTLY AND I WANT TO THANK YOU BECAUSE I'M SURE YOU HAVE ADVISERS THAT WILL CANCEL ON MARIA, CANCEL ON CNBC BUT YOU DIDN'T AND I KNOW VIEWERS OUT THERE ARE FEELING THAT THAT WAS A GOOD THING AND IT WILL BE VALUABLE TO THEM.
GORMAN: THIS IS AN ANNUAL EVENT WE HAVE YOU ON THE TRADING FLOOR IT'S GREAT YOU DO IT. FRANKLY, WE HAVE A LOT TO TALK ABOUT. SO LET’S GET INTO IT WE’RE LOOKING FORWARD TO IT.
BARTIROMO: I WANT TO GET INTO WHAT EVERYBODY IS TALKING ABOUT AND THAT IS FACEBOOK. BUT FIRST, LET'S TALK ABOUT THE SOME OF THE OTHER ISSUES THAT YOU ARE FACED WITH. THAT INCLUDES THE POSSIBILITY OF A MOODYS DOWNGRADE. MOODY'S HAS ALREADY SAID WHILE PUTTING MORGAN AND 16 OTHER BANKS ON WATCH THAT CAPITAL MARKETS FIRMS AREFACING CHALLENGES NOT REFLECTED IN THE CURRENT RATINGS THAT INCLUDES OF COURSE FRAGILE FUNDING, WIDER CREDIT SPREADS, INCREASED REGULATORY BURDENS, OPERATING CONDITIONS THAT ARE GETTING TOUGHER. ARE YOU EXPECTING A DOWNGRADE?
GORMAN: I THINK THE WHOLE INDUSTRY, MOODY'S HAS SAID ON AVERAGE THE WHOLE INDUSTRY WILL BE DOWNGRADED TWO NOTCHES AND THEY HAVE NOW DONE THE SPANISH BANKS, THE PORTUGUESE BANKS, THE ITALIAN BANKS, THEY DID SOME OF THE SCANDANAVIANS A FEW DAYS AGO, AND NOW IT'S GERMANY, AUSTRIA AND THEN THE GLOBAL CAPITAL MARKETS BANKS AS YOU SAID, THERE'S AN EXPECTATION THAT THEIR VIEW WAS, COMING INTO THE CRISIS THEY RATED ALL FINANCIAL INSTITUTIONS TOO HIGHLY AND NOW THERE'S AN ADJUSTMENT. NOW, IT'S A LONG TIME SINCE THE CRISIS. MANY INSTITUTIONS HAVE CHANGED FUNDAMENTALLY THEIR POSITION AND WE'LL TALK ABOUT MORGAN STANLEY IN THAT REGARD BUT NOW THEY ARE SORTING THROUGH IT. SO, YES.
BARTIROMO: WHAT HAVE THEY TOLD YOU THAT YOU NEED TO DO TO AVOID A DOWNGRADE?
GORMAN: IT’S NOT SO MUCH AVOID A DOWNGRADE AGAIN, I THINK THE INDUSTRY WILL BE DOWNGRADED. THE QUESTION IS TO WHAT DEGREE. WHAT WE HAVE DONE AND THE KIND OF COMPANY WE ARE NOW FROM A FEW YEARS AGO, IT'S VERY, VERY DIFFERENT AND PART OF THE DISCOVERY PROCESS WITH MOODY'S IS TO SHARE THAT INFORMATION. WE HAVE DOUBLED OUR LIQUIDITY, WE HAVE DOUBLED OUR CAPITAL, WE HAVE MORE THAN HALF THAT LEVERAGE AND SOLD 22% OF THE COMPANY TO THE THIRD LARGEST BIGGEST BANK IN THE WORLD MITSUBISHI BANK AND WE ARE DOING THIS TODAY ACQUIRING THE REST OF MSSB, SMITH BARNEY WEALTH MANAGEMENT BUSINESS. SO A LOT OF CHANGES WE HAVE NOW PUT A LOT IN FRONT OF MOODY'S TO CONSIDER AS THEY GO THROUGH THEIR PROCESS.
BARTIROMO: WHAT IS THAT PRICE OF THAT ADDITIONAL 14%?
GORMAN: THE PRICE IS BASED ON FAIR MARKET VALUE FULLY DISTRIBUTED SECURITY. SO WE WILL VALUE THAT, I'M SURE CITIGROUP WILL VALUE THAT. IF WE CAN'T AGREE, WE GO INTO AN ARBITRATION PROCESS OVER THE NEXT I THINK 90 DAYS.
BARTIROMO: ALL RIGHT. NOW, THE FEAR OUT THERE IS THAT YOU WILL SEE A 2 TO 3 NOTCH DOWNGRADE FROM MOODY'S AND THAT WILL MEAN A 5 TO $9 BILLION COLLATERAL CALL. IF YOU GET A DOWNGRADE, HOW MUCH CAPITAL ARE YOU GOING TO HAVE TO RAISE?
GORMAN: WE WON'T RAISE ANY CAPITAL. WE'VE HAD THE LIQUIDITY TO COVER THE COLLATERAL. WE ARE FULLY EXPECTING THERE WILL BE SOME DOWNGRADE. WE HAD THE LIQUIDITY. THIS IS WHY WE BUILT OUR LIQIUDITY POOL TO TAKE INTO ACCOUNT ALL UNEXPECTED POTENTIAL OUTCOMES. IT WON'T HAVE AN IMPACT ON OUR CAPITAL AT ALL.
BARITOMO: BUT A LOT OF YOUR COMPETITORS IN ANTICIPATING THIS THEY HAVE BEEN SELLING ASSETS? ARE THERE ASSETS YOU CAN SELL?
GORMAN: WELL THAT’S PART OF HOW WE RAISED OUR LIQUIDITY. WE ISSUED DEBT WE SOLD DOWN ASSETS, SHRUNK CERTAIN BUSINESSES. THIS HAS BEEN A PROCESS THAT'S BEEN GOING ON FOR TWO OR THREE YEARS NOW. SO OUR LIQUIDITY IS ALMOST 25% OF OUR TOTAL BALANCE SHEET. POINT OF REFERENCE AT THE BEGINNING OF THE FINANCIAL CRISIS, IT WAS AROUND 9 TO 10%. WE'VE RAISED THE LIQUIDITY, WE'VE SOLD ASSETS. WE'VE DONE ALL OF THIS LONG BEFORE MOODY'S CAME ALONG AND NOW WE'RE SAYING TO THEM, OKAY, WE'RE ACTUALLY IN MUCH, MUCH BETTER SHAPE THAN PERHAPS WAS UNDERSTOOD BY THE MARKETPLACE AND BY THE RATING AGENCIES AND THAT'S NOW WHERE WE ARE.
BARTIROMO: THERE'S A HIGH REGARD FOR YOUR LEADERSHIP, NO DOUBT ABOUT IT, AT MORGAN. BUT EVEN YOU COULD NOT HAVE ANTICIPATED THESE TOUGH MARKETS, WHERE VOLUME IS, VOLATILITY IS. LET'S SAY THINGS DETERIORATE EVEN FURTHER FROM HERE. YOU’VE GOT MITSHUBISHI AT 22%. WHY NOT SELL THE FIRM TO MITSUBISHI?
GORMAN: WE HAVE NO INTEREST IN DOING THAT. WE’RE RUNNING THIS ORGANIZATION WE'VE MADE ALL OF THE CHANGES SINCE THE FINANCIAL CRISIS TO POSITION OURSELVES SO WE NEVER GET IN THE KIND OF POSITION THAT WE'RE IN IN 2008 AND I THINK IF YOU LOOK AT WHAT WE'VE DONE WITH LIQUIDITY, WITH CAPITAL, AND LEVERAGE, WE'RE A FUNDAMENTALLY DIFFERENT INSTITUTION AND WE'RE VERY EXCITED ABOUT THE FUTURE. WITNESS THE DECISION ON SMITH BARNEY THIS MORNING.
BARTIROMO: IT'S INTERESTING TO SEE SUCH ASIAN INVESTORS IN THE FIRM. WOULD YOU CONSIDER THIS AN ASIAN FIRM?
GORMAN: I WOULD CONSIDER IT A GLOBAL FIRM FOR SURE. JAPAN IS AN EXTREMELY IMPORTANT ECONOMY. MITSUBISHI, AS I SAID, IS THE THIRD LARGEST DEPOSITORY INSTITUTION IN THE WORLD AND WE'VE MERGED OUR SECURITIES BUSINESSES IN JAPAN WITH MITSUBISHI. AS YOU KNOW WE HAVE A POSITION CIC OWNS A PIECE OF MORGAN STANLEY. THIS IS -- WE'RE IN A GLOBAL MARKETPLACE. THESE ARE POSITIVE TRENDS.
BARTIROMO: HAS MITSUBISHI PUSHED YOU OR ASKED TO GET A BIGGER STAKE IN TERMS OF SELLING TO MITSUBISHI, CAN YOU CATEGORICALLY RULE THAT OUT?
GORMAN: MITSUBISHI HAS BEEN VERY CLEAR. THEY CHOSE TO TAKE A SUBSTANTIAL MINORITY POSITION BELOW 25%, AT WHICH POINT OBVIOUSLY IF THEY ARE BELOW 25%, THERE ARE DIFFERENT OBLIGATIONS. THEY HAVE CHOSEN TO DO THAT. THEY ARE CURRENTLY AT 22, IT COULD HAVE BEEN AT 25, BUT THAT WAS BASED ON THE CONVERSION OF THE PREFERRED SECURITY AT THE TIME AND THEY ARE VERY COMFORTABLE WITH THAT POSITION. WE HAVE A TREMENDOUS RELATIONSHIP. I AND MY MANAGEMENT TEAM MEET WITH THE SENIOR EXECUTIVES EVERY SIX MONTHS AND EXPLORE WAYS TO BUILD AND EXPAND OUR BUSINESS AROUNDED THE WORLD AND WE'VE DONE THAT.
BARTIROMO: BUT THERE IS A COMPETITIVE FALLOUT FROM THE POSSIBLE DOWNGRADE, RIGHT? THINGS COULD CHANGE. EVEN IF THE MARKETS STAY WHERE THEY ARE RIGHT NOW, FOR EXAMPLE, THERE ARE CERTAIN CUSTOMERS THAT CAN'T DO BUSINESS WITH A FIRM THAT WOULD GET THAT KIND OF A DOWNGRADE BECAUSE OF THEIR OWN CHART. SO WHAT IS THE COMPETITIVE FALLOUT OF THAT MOODY'S DOWN GRADE?
GORMAN: HONESTLY, I DON'T THINK IT'S AS BIG AS MAYBE YOU'RE SUGGESTING. IF YOU LOOK AT THE HISTORY OF WHAT WE'VE DONE AND THE WAY WE'VE PREPARED FOR THIS AND THE KIND OF VEHICLES THAT WE HAVE TO PUT OUR DERIVATIVE POSITIONS IN, THE WORK THAT WE'VE DONE WITH OUR COUNTERPARTIES, WE ARE 8% OF OUR ISDA CONTRACTS WOULD BE AFFECTED BY THIS, IT'S VERY MANAGEABLE. NOW, WOULD WE RATHER IT NOT BE HAPPENING? OF COURSE THE WHOLE INDUSTRY WOULD THE SPANISH BANKS LAST WEEK WOULD HAVE PREFERRED IT. THE SWEDISH I THINK ON MONDAY AND TUESDAY WOULD HAVE PREFERRED IT BUT WE ARE WHERE WE ARE. AS AN INDUSTRY, WE ARE READJUSTING TO A NEW REALITY.
BARTIROMO: WE ARE GOING TO TAKE A BREAK COMING UP ON THE PROGRAM, IT'S A DEAL THAT EVERYBODY IS TALKING ABOUT AND THAT, OF COURSE, IS FACEBOOK. ONE INSTITUTIONAL INVESTOR, JAMES CALLED IT A TRAIN WRECK. WE'RE GOING TO TALK FACEBOOK NEXT. WHAT DID YOU THINK ABOUT THAT COMMENT, TRAIN WRECK?
GORMAN: IT JOINS A LONG LIST OF EXPERTS DESCRIBING WHAT HAPPENED I GUESS.
BARTIROMO: IT REALLY DOES. WE'RE GOING TO GET YOU TO EXPLAIN WHAT HAPPENED. NEXT UP, WHEN WE CONTINUE OUR CONVERSATION, OUR EXCLUSIVE WITH JAMES GORMAN WITH MORGAN STANLEY RIGHT HERE LIVE FROM THE TRADING DESK.
BARTIROMO: WELCOME BACK TO THE TRADING FLOOR OF MORGAN WE ARE HERE TALKING WITH CHAIRMAN AND CEO OF JAMES GORMAN. FACEBOOK SHARES CLOSING 5% HIGHER FOR THE DAY TODAY. IT'S THE BIGGEST SINGLE DAY GAIN SINCE THE STOCK HIT THE OPEN MARKET. BUT THE SOCIAL MEDIA GIANT REMAINES DOWN BETTER THAN 22% SINCE GOING PUBLIC ON MAY 18th, CLOSING $24.7 BILLION IN MARKET CAP LOWER SINCE MORGAN STANLEY PRICED THE DEAL AT $38 A SHARE. I'M BACK WITH MORGAN STANLEY'S CHAIRMAN AND CEO JAMES GORMAN. GOOD TO HAVE YOU BACK TALKING ABOUT FACEBOOK. JAMES, I KNOW EVERYBODY WANTS TO TALK ABOUT THIS. BEFORE I GET INTO THE DETAILS OF HOW YOU PRICED THE DEAL, WHAT WENT ON WITH THIS DEAL, I WANT TO RUN ONE QUOTE FROM PETER COHEN, THE CEO OF THE COHEN GROUP BECAUSE I THINK WHAT HE SAYS HERE I THINK ILLUSTRATES A WIDESPREAD SENTIMENTS OUT THERE. LISTEN TO THIS.
PETER COHEN: FRANKLY, IT WAS AN OVERREACH. I DON'T THINK THAT IT SHOULD HAVE BEEN UPSIZED AND I THINK THAT WE DON'T REALLY KNOW ALL OF THE FACTS ABOUT IT SO IT'S NOT FAIR FOR ME TO TALK ABOUT IT BUT I'VE NEVER, IN 43 YEARS, SEEN ANYTHING BOLLOCKS UP LIKE THIS IN MY CAREER.
BARTIROMO: YOU HEARD PETER COHEN. WAS THIS DEAL BOLLOCKS UP?
BARTIROMO: I THINK IT IS INTERESTING IF WE PLAYED THE TAPE ABOUT WHAT EVERYBODY WAS SAYING THE WEEK BEFORE THE DEAL, WOULD IT BE PRICED AT $50, THERE WAS PRICING ON EXCHANGE IN GERMANY APPARENTLY THAT MORNING OF $70 FOR A BRIEF PERIOD. THE SECONDARY MARKET HAD THIS TRADING AT HIGHER NUMBERS AT DIFFERENT POINTS. THERE WERE A THE LOT OF OPINIONS THE WEEK BEFORE A. LOT OF OPINIONS INCLUDING PETER COHEN AFTER. VERY DIFFERENT THOUGH ACTUALLY BEING IN THE ROOM AND UNDERSTANDING WHAT THE DEMAND WAS AT THAT POINT IN TIME. NOW OPERATING AS AN UNDERWRITER, YOU'RE MATCHING BOTH THE SELLER'S DESIRE TO GET A FAIR PRICE FOR THE COMPANY THAT THEY HAVE BUILT AND THE RISK THAT THEY UNDERTOOK WITH OBVIOUSLY THE DEMAND IN THE MARKETPLACE. AND THAT WAS THE PROCESS WE WENT THROUGH
BARTIROMO: SO WHAT HAPPENED DO YOU THINK THAT THE DEMAND JUST DRIED UP?
GORMAN: I THINK THIS IS A VERY COMPLICATED STORY. BY THE WAY, WE'RE ON DAY 7 OR 8 OF THE STORY. AND I THINK THE STOCK WAS UP 10% FROM THE LOWS JUST TODAY. THIS IS ONE OF THE MOST VOLATILE OPENINGS TO AN IPO EVER AND IT ALSO HAPPENS TO BE ONE OF THE LARGEST EVER AND ALSO HAPPENS TO BE ONE THAT HAS AFFECTS AN INSTITUTION THAT IS TOUCHING 900 INDIVIDUALS AROUND THE WORLD. SO IT'S GOT HYPE GOING IN EVERY SINGLE DIRECTION. WE SPENT THE TIME ALL OF THE UNDERWRITERS PUTTING TOGETHER AND TRYING TO FIND THE RIGHT PRICING INTEGRITY OBVIOUSLY WORKING WITH INSTITUTIONAL SHAREHOLDERS AND RETAIL SHAREHOLDER ESTABLISHING A PRICING RANGE AND WAS ULTIMATELY PRICED AT THE TOP OF NOT ABOVE BUT AT THE TOP OF THE REVISED RANGE OF $38.
MARIA BARTIROMO: I WANT TO GET INTO HOW YOU CAME UP WITH THAT VALUATION, BUT FIRST I WAS READING YOUR COMMENTS TO YOUR TEAM HERE JUST THE OTHER DAY AND YOU SAID THERE WAS UNPRECEDENTED CONFUSION AND DISARRAY IN THE OPENING HOURS OF THE FACEBOOK IPO. WHAT HAPPENED?
JAMES GORMAN: WELL, WE THOUGHT WE WERE OPENING WITH THE MARKET, SHORTLY AFTER THE MARKET WAS OPENING AND IT WAS CLEAR THAT THE EXCHANGE HANDLING THE ISSUE, NASDAQ, WAS HAVING PROBLEMS AND THOSE PROBLEMS WERE BEING -- WE WERE BEING UPDATED EVERY COUPLE OF MINUTES AND DELAYED EVERY FEW MINUTES AND EVENTUALLY THEY DECLARED A GO. EVERYBODY COULD GO AND WE COULD START PROCEEDING WITH THE TRANSACTION AND WITH THAT, OVER THE NEXT COUPLE OF HOURS, THERE RAINED ENORMOUS CONFUSION, DISARRAY. BECAUSE BUYERS AND SELLERS DIDN’T KNOW WHAT THEY WERE BEING FILLED AT. SOME PEOPLE WHO THOUGHT THEY WERE LONG WERE SHORT. SOME PEOPLE WHO THOUGHT THEY HAD SOLD AT 42 HAD SOLD AT 41. SOME BUYERS WHO THOUGHT THEY BOUGHT AT 38 WERE BUYING AT 40. THAT CONFUSION, FRANKLY, IN A DEAL OF ALMOST UNPRECEDENTED SIZE AGAINST A MACRO BACKDROP OF EVERYTHING GOING ON IN GREECE AND SO ON, CREATED A SORT OF POTENT ELIXIR, IF YOU WILL, THAT REALLY SET THIS THING AFLAME.
BARTIROMO: BUT SEE THAT IS REALLY THE POINT, RIGHT? WE ALL KNEW THIS WAS A LOT OF HYPE AROUND IT. WE ALL KNEW THIS WAS GOING TO BE AN ENORMOUS DEAL. SO HOW DID THESE MISTAKES HAPPEN? WHAT DO YOU WANT TO SAY TO THE GUY OUT THERE WHO THOUGHT HE BOUGHT THIS STOCK AT 38 OR EVEN 37 AND IN FACT HE GOT HIS STATEMENT MONDAY, YOU KNOW, AT 42.
GORMAN: I'D LIKE TO THINK THAT FIRSTLY, THE GROUP OF PEOPLE THAT THOUGHT THEY WERE BUYING THE STOCK SO THEY COULD GET AN ENORMOUS POP WERE BOTH NAIVE AND BOUGHT IT UNDER THE WRONG PRETENSES. WHAT ANY COMPANY IS DOING, WHEN YOU ARE TAKING COMPANIES PUBLIC, IS TO ESTABLISH A LONG-TERM INVESTOR BASE. SO TO THAT INDIVDUAL, I WOULD HOPE THAT THEY HAVEN'T PANICKED DURING THE FLURRY THE LAST FEW DAYS AND, AGAIN, WITNESS TODAY MARIA, THE STOCK TRADED AT 26.80 OR SOMETHING AT THE LOWS. IT FINISHED 10% HIGHER FROM ITS LOWS. WE REMAIN IN A VERY VOLATILE PERIOD.
BARTIROMO: WHAT KIND OF ACCOMMODATION ARE YOU PREPARED TO OFFER THAT INVESTOR WHO FEELS LIKE THEY GOT THE SHORT END OF THE STICK ON THIS DEAL? ARE YOU COMING UP WITH ACCOMMODATION PACKAGES FOR THEM? ARE THEY GOING TO GET MONEY BACK?
GORMAN: WELL NO EVERY MEMBER OF THE UNDERWRTING SYNDICATE HAS TO WORK WITH THEIR OWN CLIENTELE AND OBVIOUSLY WITH THE EXCHANGE WITH NASDAQ IN FINDING OUT AND WHAT WE REALLY WANT TO ENSURE IS THAT THEY HAD BEST EXECUTION THAT’S OUR OBLIGATION AND THAT'S A PROCESS WE ARE WORKING THROUGH WITH OUR CLIENTS.
BARTIROMO: OK LET’S TALK ABOUT THE PRICING YOU WERE ON THE PRICING CALL. TELL US WHAT WENT INTO DECIDING $38 A SHARE. VALUING THIS COMPANY AT MORE THAN $100 BILLION IN MARKET VALUE. I WANT TO FIND OUT SORT OF WHERE THINGS SORT OF STARTED TO TURN NEGATIVE, WHERE PEOPLE STARTED QUESTIONING AND CANCELING ORDERS AND MODIFYING THOSE ORDERS. FIRST UP, HOW DID YOU COME UP WITH THAT VALUATION?
GORMAN: WELL, AS YOU KNOW, YOU GO THROUGH A PROCESS WHERE YOU ESTABLISH A PRICING RANGE, BASED UPON THE S-1, ALL INVESTORS INTERESTED IN THE SECURITY HAVE ACCESS TO THE S1 AND ANY AMMENDMENTS AND THERE WAS AN AMENDMENT TO THE S1 IN THIS PARTICULAR CASE AND THEN YOU ESTABLISH A LEVEL OF DEMAND OR PRICE INTEGRITY, PRICE DISCOVERY BY TALKING TO THE INSTITUTIONAL THE CORE LARGE 100 INSTITUTIONAL INVESTORS THE NEXT MANY HUNDREDS INSTIUTIONAL INVESTORS ESTABLISHING SEEING WHAT SORT OF ORDERS ARE COMING THROUGH ON THE RETAIL SYSTEM AND YOU PULL ALL OF THAT INFORMATION TOGETHER TO TRY AND UNDERSTAND WHAT IS THE BEST PRICE FOR THE SELLERS WHO, BY THE WAY, WE DON'T TALK ABOUT THIS. THIS IS AN AMERICAN CELEBRATION. LET'S STEP BACK FROM THE DAY 3, 4, 5 PROCESSING. FACEBOOK IS A PHEMONENON IT’S A PHENOMENAL COMPANY AND A PHEMONENON ITSELF.
BARTIROMO: IT’S A CELEBRATION FOR A GUY LIKE MARK ZUCKERBERG AND THE INSIDERS WHO GOT ALL THIS BUT FOR THE GUY WHO YOU KNOW THOUGHT THAT THEY WERE BUYING INTO THIS GREAT INNOVATION AMERICAN SUCCESS STORY IT'S NOT A CELEBRATION.
GORMAN: BUT THE STORY ISN'T OVER. AGAIN WE ARE AT DAY 8 HERE GIVE THIS A LITTLE BIT OF TIME DAY ONE THE STOCK OPENED ABOVE 42 DOLLARS AND THE AVERAGE WEIGHT OF PRICE FOR THE FIRST DAY WAS 5% IMPROVEMENT. WE JUST HAVE TO BE A LITTLE PATIENT. THERE WAS MORE HYPE GOING INTO THIS I THOUGHT THAN ANY SECURITY EVER TRADED. HOWEVER, THE HYPE IN THE LAST FEW DAYS HAS EXCEEDED THAT. WE JUST ALL NEED TO SETTLE DOWN A LITTLE BIT FIND THE RIGHT BASE GET BACK TO THE FUNDAMENTALS OF WHAT IS THIS GREAT COMPANY DOING AND CAPABLE OF DOING WITH ITS 900 MILLION ACTIVE USERS THAT THEY HAVE OUT THERE AND GIVE THIS A LITTLE BIT OF TIME. LET’S HAVE THIS DISCUSSION AGAIN IN 12 MONTHS AT THE 12 MONTH POINT.
BARTIROMO: SO YOU THINK MAYBE IN 12 MONTHS WE MIGHT BE TALKING ABOUT A MUCH HIGHER STOCK PRICE
GORMAN: I AM NOT GOING TO COMMENT ON THE STOCK BUT I THINK LET'S GET AWAY FROM THE FURY AND FRENZY OF THE LAST COUPLE OF DAYS AND WHETHER IT'S PETER COHEN OR A LOT OF OTHER PEOPLE WHO FRANKLY HAVE NO KNOWLEDGE OF WHAT THE DEMAND WAS FOR THE SECURITY OPINING OF WHAT IT SHOULD HAVE BEEN.
BARTIROMO: I KNOW YOU MUST HAVE GOTTEN CALLS FROM PEOPLE WANTING ALLOCATION GET ME IN ON THIS DEAL I THOUGHT IT WAS INTERESTING THAT THE RETAIL ALLOCATION WAS 25% RETAIL NEVER GETS THAT MUCH OF A HOT DEAL HOW COME SO MUCH TO RETAIL?
GORMAN: IT WAS CLOSE IT WAS 26% LOOK AT THE GM DEAL WHICH WAS A SIGNIFICANTLY LARGER DEAL THE RETAIL ALLOCATION THERE WAS 20% KRAFT IT WAS AT 29% JUST LAST WEEK THE BLACKROCK DEAL WAS ACTUALLY HIGHER THAN THAT SO ITS NOT ACTUALLY THAT UNUSUAL FOR A COMPANY THAT HAS VERY HIGH RETAIL INTEREST. AND WE HAD IN OUR SYSTEM AND I CAN’T SPEAK FOR SOME OF THE OTHER UNDERWRITERS WE HAD UNPRECEDENTED RETAIL DEMAND WE HAD PEOPLE CALLING IN EVERY PART OF THE COUNTRY AN INTERNATIONALLY WANTING IN ON THIS DEAL SO THAT DEMAND WAS THERE AT A LEVEL THAT WE FRANKLY HADN’T SEEN I DON’T KNOW EVER.
BARTIROMO: DID YOU BUY PERSONALLY IN THE DEAL?
GORMAN: NO AS AN UNDERWRITER I SEPARATE MY PERSONAL FINANCIALS FROM
BARTIROMO: DO YOU HAVE POSITIONS RIGHT NOW IN TERMS OF GETTING BENEFITTING FROM THE STOCK GOING DOWN, A LOT OF SPECULATION ON WHETHER OR NOT MORGAN MADE MONEY ON THE STOCK GOING DOWN BECAUSE OF THE GREEN SHOE?
GORMAN: WELL, OUR INTENT IS NOT TO MAKE MONEY ON THE GREEN SHOE. OUR OBLIGATION AS A STABILIZING AGENT TO BE THE STAILIZER OF THE SECURITY AND OBVIOUSLY THE SHOE HELPS YOU PERFORM THAT FUNCTION.
BARTIROMO: BUT DID YOU MAKE MONEY ON IT?
GORMAN: WE ARE NOT DONE YET. WE ARE STILL IN A PROCESS AND AS I SAID THIS PROCESS IS GOING TO UNFOLD OVER WEEKS AND EVENTUALLY ALL OF THIS INFORMATION WILL BE DISCLOSED. OUR INTENT, MARIA, IS TO SUPPORT OUR CLIENT, TO PROVIDE A READY MARKET MATCHING BUYERS AND SELLERS. AND ALL OF THE UNDERWRITERS, KEY TO THIS SYNDICATE, IN ADDITION TO THE COMPANY, AGREE THAT THE PRICING IS APPROPRIATE GIVEN THE DEMAND OF SUPPLY.
BARTIROMO: WHY RAISE THE NUMBER OF SHARES? SOME HEDGE FUNDS GOT ANNOYED BY THAT BY RAISING THE AMOUNT OF STOCK, TAKING IT UP 25%? WHAT WAS BEHIND THAT? RAISING THE NUMBER OF SHARES, THE PRICE A LOT OF PEOPLE WONDERED ABOUT
GORMAN: WELL IT’S NOT TERRIBLY UNUSUAL TO RAISE THE NUMBER OF SHARES. YOU GO OUT WITH AN EXPECTATION THAT THERE IS A DENAMD FOR A CERTAIN NUMBER OF SHARES A BELIEF BUT YOU DON’T REALLY KNOW YOU THEN GO AND DO THE WORK THAT’S WHAT THE ROAD SHOW DOES AND IT EITHER EXCITES OR DIMINISHES DEMAND. IN THIS PARTICULAR CASE IT WAS APPARENT EARLY INTO THE ROAD SHOW THAT THE DEMAND WAS SIGNIFICANTLY BEYOND WHAT PEOPLE THOUGHT IT MIGHT BE. AND THAT IS WHY IT WAS RAISED SAME THING HAPPENED BY THE WAY WITH GM AND I BELIEVE WE INCREASED THE TOTAL SHARES THAT WENT UP LIKE 20, 21% WITH GM. ALMOST IDENTICAL.
BARTIROMO: LET ME SWITCH GEARS AND ASK YOU ABOUT THE ANALYST CUTTING ESTIMATES. I RECOGNIZE THAT THERE WAS AN AMENDED -- AN AMENDMENT TO THE S1 AND ALL OF THAT INFORMATION WAS RIGHT THERE. BUT YOUR ANALYSTS CUTTING ESTIMATES ALONG WITH THE OTHER ANALYSTS ON THE ROAD SHOW, A LOT OF PEOPLE SAYING THIS IS A CONFLICT OF INTEREST AND THEN THE NUMBER OF CLIENTS ACTUALLY RECEIVED THAT INFORMATION. WERE YOU SELECTING YOUR BEST CLIENTS TO TELL THEM WE’RE CUTTING ESTIMATES HERE? HOW DID YOU DECIDE WHO TO TELL THE INFORMATION IN TERMS OF CUTTING THOSE ESTIMATES?
GORMAN: ABSOLUTELY NOT. FIRSTLY, THERE IS JUST SO EVERYBODY UNDERSTANDS WHAT THE PROCESS IS, AFTER YOU RECEIVE AN S1, IF THERE IS A CHANGE IN WHAT THE PERFORMANCE OF THE COMPANY IS BELIEVED TO BE, AND IN FACEBOOK I THINK ACTING WITH GREAT INTEGRITY ALERTED THE MARKETPLACE RELATING TO MOBILE ADVERTISING, WHAT THE NUMBERS, WHAT THE DIRECTION WAS, TRAJECTORY FOR Q 2 OVER Q1. AND WE PUT OUT AN AMENDMENT TO THE S-1 AND THAT WENT TO EVERY INVESTOR. AND BASED UPON THAT AND BASED UPON THE COMPANY MAKING THAT ALERT, I SAW AND I'VE GOT A LIST OF OVER 20 NEWS ORGANIZATIONS WHO REPORTED THAT, WHICH INCLUDED, BY THE WAY, CNBC, WHO CAME OUT AND SAID THERE WAS A REVISION THAT WAS FRANKLY A MODEST REVISION TO THE PROJECTIONS FOR FACEBOOK WHICH TRANSLATED INTO AN AMENDMENT AND SAID DEAR INVESTORS WE KNOW YOU ARE INTERESTED IN THE STOCK, HERE'S THE AMENDMENT. EVERYBODY MAKE UP YOUR MIND. AND THE POLICY THAT WE AND THE UNDERWRITERS OPERATED UNDER, AND THIS HAS BEEN LOOK AT A NUMBER OF TIMES OVER THE YEARS BY THE REGULATORS AND I BELIEVE THE S.E.C. IS THAT THERE IS INDIVIDUAL DISCLOSURE ORAL DISCLOSURE, NO WRITTEN REPORTS TO INSTITUTIONAL INVESTORS INTERESTED IN WHAT THAT PARTICULAR ANALYST SAYS BECAUSE THEY CAN GO TO MANY OF THE COMPANIES PICK UP INPUT FROM A NUMBER OF THE DIFFERENT UNDERWRITERS AND THE POLICY TO DATE HAS NOT BEEN OFFERED THAT SAME INFORMATION EITHER THE ORIGINAL PROJECTION OR THE REVISED TO RETAIL INVESTORS.
BARTIROMO: SO DO YOU WORRY, YOU KNOW, YEAH, YOU'VE GOT THE AMENDED S-1 BUT THE AVERAGE GUY OUT THERE, THEY DON'T KNOW HOW TO READ THAT S-1. THEY DON'T KNOW WHAT THEY ARE LOOKING FOR AND THEY ARE SAYING THE BEST CLIENTS OF MORGAN GOT THAT BEFORE I DO. MAYBE THAT'S WHY YOU HAVE MAJOR CANCELLATIONS AND MODIFICATIONS OF THOSE ORDERS.
GORMAN: NO. BUT ALL OF THIS OCCURRED BEFORE. ALL OF THIS WAS DURING THE PERIOD OF THE ROAD SHOW. IT WASN'T AFTER THE TRANSACTION WENT PUBLIC. AND THE DEMAND WAS STILL THERE AT THAT POINT WHEN WE GOT TO THE END OF THE ROAD SHOW AND, LISTEN, THERE WILL BE VARIOUS INQUIRIES AND I KNOW THE SEC AND CONGRESS HAVE LOOKED AT THAT I’VE SAID TO MY ORGANIZING THERE WAS NO NEPHARIOUS ACTIVITY THIS WAS STANDARD OPERATING PROCEDURE. IT'S THE POLICY WE AND ALL OF THE OTHER UNDERWRITERS HAVE OPERATED UNDER WITH RETAIL ORGANIZATIONS AND THERE WASN'T ANY DESIRE TO OBFUSCATE OR HIDE. THIS WAS A STANDARD OPERATING PROCEDURE AND IT WAS IN THE PUBLIC DOMAIN.
BARTIROMO: AND I KNOW POST DEAL YOU'VE GOT LOTS OF INQUIRIES COMING, WHETHER IT'S THE S.E.C., YOU’VE GOT THE REGULATORS LOOKING AT ALL OF THIS. WHAT CAN YOU TELL US ABOUT THAT? WHERE DOES THAT STAND IN TERMS OF INVESTORS WANTING TO KNOW WHAT THE NEXT STEP IS WITH MORGAN STANLEY AND WHAT KIND OF ISSUES YOU FACE BECAUSE OF ALL OF THESE INQUIRIES INTO WHAT WENT ON?
GORMAN: I CAN’T PREJUDGE THEM BUT I'VE LOOKED AT THIS, AS YOU CAN IMAGINE, PRETTY CLOSELY. AND I'M CONFIDENT THAT WE'VE FOLLOWED EXACTLY THE PROCEDURES WE'VE FOLLOWED. WE DID THE JOB OF THE UNDERWRITER. WE'VE REPRESENTED THE INTERESTS OF THE SELLERS AND BUYERS PUTTING TOGETHER A BOOK AS PART OF THE SYNDICATE AND WE, THE OTHER UNDERWRITERS AND THE COMPANY AGREED ON THAT PRICING SO LISTEN IT IS THE REGULATORS SHOULD LOOK AT THIS BECAUSE IT'S ATTRACTED SO MUCH ATTENTION AND SO MUCH HYPE BUT, AGAIN, THE JOURNEY IS NOT OVER. RIGHT? THIS IS WEEK NUMBER TWO. DAY NUMBER ONE, THIS LOOKED GREAT. EVERYONE SAID THE UNDERWRITERS DID THEIR GOAL THE COMPANY WAS HAPPY, BUYERS WERE HAPPY, SELLERS WERE HAPPY AND THEN OBVIOUSLY WE WENT INTO A DOWNWARD SPIRAL FOR SEVERAL DAYS AND WHO KNOWS WHERE WE ARE AT THIS POINT AS I SAID EARLIER WE ARE OBVIOUSLY OFF THE LOWS THIS AFTERNOON.
BARTIROMO: I KNOW IT HAS BEEN A WILD COUPLE OF WEEKS FOR YOU JAMES. FINAL QUESTION HERE, I KNOW YOU'RE PLANNING TO MOVE A CHUNK OF THAT $52 TRILLION DERIVATIVES PORTFOLIO INTO THE BANKING SUBSIDIARY, THAT OF COURSE WOULD MITIGATE ANY FALLOUT FROM THE POSSIBLE MOODY’S DOWNGRADE. WHERE ARE YOU ON THAT? ARE YOU EXPECTING THE FEDS TO GO FOR THAT? WHEN ARE YOU GOING TO FIND OUT?
GORMAN: WELL I CAN’T-- I DON'T KNOW WHEN WE'RE GOING TO FIND OUT. IT CERTAINLY WOULD BE CONSISTENT WITH WHAT I BELIEVE ALL OF THE OTHER BANKS HAVE. AND WOULD CREATE A LEVEL PLAYING FIELD. SO IT'S ENTIRELY LOGICAL THAT THAT IS WHERE THE REGULATORS AND THE FED, IN PARTICULAR, IN THIS CASE WOULD DECIDE TO PUT IT. BUT REMAINS TO BE SEEN. WE ARE CONFIDENT THAT THAT'S THE RIGHT PLACE TO GET IT DONE BECAUSE THAT'S WHAT ALL OF THE BANKS ARE ABLE TO DO.
BARTIROMO: ARE YOU AFRAID THAT FUTURE TECH IPOs ARE GOING TO THINK TWICE ABOUT DOING BUSINESS WITH YOU AFTER THE FACEBOOK DEAL?
GORMAN: OH NO. WE HAVEA LONG TRACK RECORD, YOU’VE BEEN ON THE FLOOR TODAY, OUR GTM FLOOR, WE HAVE TREMENDOUS PEOPLE. THEY DID THE RIGHT THING. ALL YOU CAN DO, MARIA, IS WORK WITH THE INFORMATION THAT YOU HAVE AT THAT POINT IN TIME AND APPLY YOUR PROFESSIONAL JUDGMENT. AND THERE WERE MANY PEOPLE COMING TO THIS EXPECTING THAT THIS THING WOULD BE SOLD AT 40 PLUS DOLLARS. IT WASN'T. THERE WAS DEMAND. IT WENT UP 10% AT THE OPENING. AVERAGED 5% FOR THE DAY. IT CLOSED FINALLY UP ON THE DAY AND THEN WE'VE GONE INTO A VERY NEGATIVE SPIRAL HERE WHICH I HOPE IS NOW BEING ADDRESSED AND WILL ADJUST OVER TIME.
BARTIROMO: JAMES, WE KNOW YOU'VE HAD A WILD TWO WEEKS. YOU COULD HAVE CANCELED ON THE INTERVIEW. YOU DID NOT. YOU CAME TO ANSWER THE QUESTIONS STRAIGHT ON. WE THANK YOU FOR THAT.
GORMAN: IT'S IMPORTANT. THANK YOU VERY MUCH FOR SPENDING YOUR TIME HERE.
BARTIROMO: THANK YOU VERY MUCH. JAMES GORMAN IS THE CHAIRMAN AND CEO OF MORGAN STANLEY.
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