Morgan Stanley CEO: Signs of End to Mortgage Crisis

Morgan Stanley
Oliver P. Quillia for

Morgan Stanley Chief Executive John Mack on Tuesday said financial markets are the most difficult he has seen in 40 years, but there are several signs investment banks are closer to working through their painful mortgage and corporate loan woes.

The United States is nearing the end of the subprime mortgage crisis, Mack said, though adding he is still concerned about more potential losses stemming from commercial mortgages, European markets and mid-size U.S. banks. (Video: CNBC's Mary Thompson reports from the Morgan Stanley shareholder meeting in Purchase, NY.)

"It's going to be a difficult year for the Street. If you think about all the moving parts...I think the Street has a lot of work to do," said Mack. "We're making progress, but there are still concerns."

Speaking on the sidelines of Morgan Stanley's annual meeting in Purchase, New York, Mack predicted the financial crisis that has hammered banks for the past year will continue to challenge banks for several more quarters.

He cited news from UBS last week disclosing an additional $19 billion in mortgage and other debt losses, which sparked talk that there is more bad news ahead from the financial sector.

UBS last year posted $18 billion of losses.

Ballgame Almost Over

Still, Mack offered upbeat predictions that the markets for mortgages and leveraged loans used to finance big buyouts may soon be out of the woods.

"If you look at the subprime problem in the U.S., you would say were in the eighth inning or maybe the top of the ninth," of a nine-inning baseball game, Mack said. "Leveraged lending, as we know it, is in the ninth inning."

Aside from deals to help finance buyouts of Clear Channel Communications and BCE, which Morgan Stanley has agreed to fund and has already marked down, Mack said there are no other big deals festering in its backlog.

Problems stemming from commercial mortgages are about half way through, said Mack, who added no one really knows how much more trouble will flow out of European debt markets.

"We just don't know. We don't have enough information yet," Mack said.

"We keep getting disclosures that surprise us." Mack said Morgan Stanley, which absorbed $9.4 billion of fourth- quarter losses from poorly managed mortgage trades, remains focused on boosting balances of ready cash and taking fewer risks.

While a number of investment firms are launching funds to scoop up distressed debt, Mack said Morgan Stanley is pursuing these opportunities "gingerly."

Positive Signals

There are several signs that conditions are improving, Mack said.

The fact that Washington Mutual on Tuesday received a $7 billion capital infusion from TPG Capital and other private investors is encouraging, Mack added.

"A move like that really brings confidence back into the market," said Mack.

Investors, meanwhile, have socked away trillions of dollars into bank deposits and money market funds, a large supply of liquidity that some day may be redeployed into the market.

"At some point, you'd think, this thing will bounce off the bottom," said Mack.

There has been growing confidence among investors that banks are owning up to their problems and moving on.

Lehman Brothers saw strong demand for its sale of $4 billion of convertible preferred securities.

UBS ousted its chairman and recorded a $19 billion write-down, yet it also sold $15 billion of rights to its shareholders.

"What we're beginning to see is firms are looking at their positions and saying, 'Hey, wait a minute. There's more here than what we've said,' and that's very healthy," Mack said.

Of course, any rebound is likely to be bumpy, he added.

"One thing all the firms are dealing with is accounting changes for the fair value of their own debt. That makes it a real yo-yo for firms in terms of up and down marks," he said.

Mack meanwhile expressed confidence that mortgage trades that wiped out fourth-quarter profit and forced the bank to seek $5 billion from China, will not be a factor any longer.

"It's contained. We had a net position of $1.8 billion when we reported fourth quarter earnings and that position was about the same at the end of the first quarter (on Feb 29). There's been some movement up and down, but nothing of real significance," Mack said.

Meeting Results

Strong first quarter results, and continued confidence in Mack, defused what could have been a contentious annual meeting.

Amid calls from some critics to force Mack to cede his chairman's role, shareholders approved the reelection of all directors with all receiving more than 90 percent of votes.

Union pension adviser CtW Investment Group had lobbied investors to withhold votes from Mack and some key directors in response to the fourth-quarter losses.

Proxy adviser Glass Lewis also recommended votes against some directors, saying the board failed to manage risk.

ISS, the most influential adviser among investors, said shareholders should reelect all directors, even as it found fault with the board's performance.

Shareholders also voted down a proposal submitted by union group AFSCME that would have given shareholders an advisory vote on executive compensation, with only 36.8 percent favoring the plan in a preliminary tally.

Last year "Say on Pay" received 37 percent approval.

Say-on-pay proposals will be considered by dozens of other big U.S. companies as the spring annual meeting season continues.

Speaking on the sidelines of Morgan Stanley's  annual meeting, Mack said the financial crisis has several more quarters to go.

This year will be difficult for Wall Street, Mack said. Morgan Stanley is still focusing on liquidity and conserving its cash.