WHEN: Today, Thursday, June 29th
WHERE: CNBC's "Closing Bell"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Morgan Stanley Chairman and CEO James Gorman and Melissa Lee on CNBC's "Closing Bell" (M-F, 3PM-5PM ET) today, Thursday, June 29th. Following is a link to the interview on CNBC.com: http://www.cnbc.com/video/2017/06/29/weve-had-extraordinarily-low-rates-around-world-mss-james-gorman.html
All references must be sourced to CNBC.
MELISSA LEE: THANKS SO MUCH, KELLY AND JAMES THANKS SO MUCH FOR JOINING US I KNOW YOURE BUSY ON A DAY LIKE TODAY WITH THE CONFERENCE GOING ON.
JAMES GORMAN: GREAT TO BE HERE, MELISSA, THANK YOU.
LEE: LETS TALK ABOUT THE MARKETS. WE HAD SEEN A SELL-OFF WE CLOSED OFF THE LOWS OF THE SESSION. BUT WHAT HAS HAPPENED IN THE WEEK OR SO AS YOU KNOW IS THAT GLOBAL BONDS AROUND THE WORLD HAVE BEEN DOWN FOR THREE STRAIGHT DAYS AND YIELDS HAVE BEEN HIGHER. DO YOU THINK THAT THAT IS THE CAUSE OF THE MARKET JITTERS THAT WERE SEEING RIGHT NOW?
GORMAN: THERES OBVIOUSLY SOME CONNECTION WITH WHATS GOING ON IN THE EQUITIES MARKET AND BOND YIELDS WEVE HAD INCREDIBLY FLAT YIELD CURVE. I THINK THIS IS NOW BEGINNING OF THE PERHAPS MORE NORMALIZATION ITS BEEN A SMALL MOVE IN THE GREATER CONTEXT, BUT ITS BEEN A MOVE.
LEE: AND ITS BEEN A MOVE, PRETTY STARTLING MOVE IN JUST THE PAST WEEK, WHEN YOU THINK ABOUT THE STANDARDS OF THE BOND MARKET TO HAVE THE U.S. TEN-YEAR YIELD GO UP BY 10 OR 11 BASIS POINTS WITHIN A MATTER OF DAYS IS A PRETTY BIG MOVE AND YOU ALSO HAD HAWKISH COMMENTARY COMING OUT FROM THE ECB, THE BANK OF ENGLAND, BANK OF CANADA, THE FED INDICATING ITS GOING TO TIGHTEN FURTHER. DO YOU THINK INVESTORS MAY BE TOO SANGUINE WHEN IT COMES TO THE RISK FROM RISING RATES PARTICULARLY WHAT'S HAPPENING IN A CONCERTIVE FASHION AROUND THE WORLD?
GORMAN: IT'S ALL A QUESTION OF WHERE THEYRE RISING FROM. WEVE HAD EXTRAORDINARILY LOW RATES AROUND THE GLOBE SO THE FACT THAT YOURE SEEING SOME PATH TOWARDS MORE NORMAL RATES, I DONT THINK THATS A REFLECTION OF BEING SANGUINE ABOUT IT FROM AN INVESTOR PERSPECTIVE I THINK WE'RE JUST SEEING AN ADJUSTMENT. WEVE ALL BEEN WAITING FOR THIS. ITS NOT TOTALLY CLEAR THAT WEVE GOT THE ADJUSTMENT, BUT WEVE BEEN WAITING FOR SOME ACTION THE MARKET, AS YOU KNOW, INCREDIBLY LOW VOLUME, LOW VOLATILITY EVERYBODY HAS BEEN SITTING ON THEIR HANDS WEVE BEEN TRYING TO RECONCILE, OBVIOUSLY THE EQUITY MARKETS RELATIVELY EXPENSIVE, BUT CORPORATE EARNINGS YEAR OVER YEAR ARE PHENOMENAL ON THE ONE HAND THERE'S THAT ON THE OTHER HAND THE FLAT YIELD CURVE, AND CONFLICTING MESSAGES FROM THE VARIOUS MONETARY REGIMES AROUND THE WORLD SO WERE NOW COMING INTO THIS PERIOD OF REAL VOLATILITY. PEOPLE ARE TAKING POSITIONS. AND WERE SEEING THAT ACTION IN THE MARKET.
LEE: FOR INSTANCE, IN TODAYS MARKET ACTION, WE SAW THE VOLATILITY INDEX JUMP.
GORMAN: I SAW THAT.
LEE: UP ABOUT 14 AT ONE POINT IN THE SESSION. DO YOU THINK THATS JUST SORT OF A PRECURSOR OF WHATS TO COME GIVEN WHATS HAPPENING RIGHT NOW IN THE MARKETS?
GORMAN: LOOK AT WHERE ITS BEEN WEVE HAD THE MOST INACTIVE THREE OR FOUR MONTHS FOR A VERY LONG TIME. SO THIS IS NOW MOVING BACK TO PEOPLE TAKING POSITIONS. THE MARKET HAVING A VIEW MELISSA, WEVE HAD A VERY UNUSUAL SITUATION. THE GLOBAL CONOMY, IF YOU ADD UP WHATS GONE ON IN THE U.S., CHINA, JAPAN RECOVERING, EUROPE ACTUALLY HAS DONE REMARKABLY WELL GIVEN ALL THATS BEEN GOING ON THE GLOBAL ECONOMY IS DOING WELL THE UNCERTAINTY HAS BEEN THE POLITICAL AND GEOPOLITICAL UNCERTAINTY. INVESTORS ARE TRYING TO RECONCILE THAT THE ABSENCE OF OBAMACARE BEING REPEALED AND REPLACED, THE ABSENCE OF A TAX REFORM PROGRAM COMING THROUGH, THE ABSENCE OF VARIOUS OTHER INITIATIVES COMING OUT OF THE ADMINISTRATION, PEOPLE ARE WAITING FOR SOMETHING TO HAPPEN. AND WERE STARTING TO GET TO AN INFLECTION POINT WHERE YOU HAVE TO ENGAGE IN THE MARKET.
LEE: YOU'RE NOT WORRIED THAT THE RISING RATES WEVE SEEN AROUND THE WORLD THE MARKET JITTERS WE HAVE SEEN, THAT THATS THE START OF SOME SORT OF TAPER TANTRUM PART TWO?
GORMAN: I DONT THINK SO. IF WE HAVE A HEALTHY CORRECTION HERE, THAT WOULDNT BE ALL BAD AND IN FACT WATCHING CNBC TODAY, A NUMBER OF COMMENTATERS TALKED ABOUT WERE DUE FOR A 5+ PERCENT CORRECTION YOUVE SEEN WHATS GONE ON IN THE SO-CALLED FANG STOCKS. THEYRE OFF AGAIN TODAY. THERES A ROTATION THERES ROTATION IN THE FINANCIALS. I'M SURE WELL TALK ABOUT THAT IN A MINUTE.
LEE: YEAH.
GORMAN: THESE ARE HEALTHY ADJUSTMENTS TO THE MARKET. MARKETS SHOULDNT BE MOVING IN A mTRAIGHT LINE. AM I CONCERNED ABOUT THIS? NO AM I SURPRISED NOT AT ALL.
LEE: LET'S TALK ABOUT THE CCAR RESULTS, OR THE STRESS TEST RESULTS. MORGAN STANLEY TODAY UP NICELY BETTER THAN MANY OF ITS PEERS IN THE MARKET AS YOU WELL KNOW BECAUSE YOU WATCH THE STOCK VERY CLOSELY, OF COURSE. WHAT DOES THIS TELL US ABOUT THE HEALTH OF BANK STOCKS AND BANKS AS AN INVESTMENT, PARTICULARLY WHEN INVESTORS ARE GRAPPLING WITH HOW MUCH THEY SHOULD BE PAYING FOR BANK STOCKS, WHEN IT COMES TO PRICE ENTANGIBLE BOOK VALUE?
GORMAN: YEAH, WELL, STEP BACK FOR A MINUTE AND HERE WE ARE EIGHT, NINE YEARS FROM THE FINANCIAL CRISIS. THE CAPITAL LEVELS, THE LEVEL OF LIQUIDITY, THE CHANGE IN LEVERAGE RATIOS, HAS BEEN HISTORIC. I MEAN, THIS – EVERYBODY SHOULD DECLARE A LITTLE VICTORY HERE. THE REGULATORS HAVE GOT THE CAPITAL POSITION OF THE BANKS INTO AN INCREDIBLY STRONG POSITION IN THIS COUNTRY. NOT EVERYWHERE IN THE WORLD, BUT IN THIS COUNTRY. AND WHAT YOU SAW, I THINK, WAS 34 BANKS CAME THROUGH CCAR THIS TIME?
LEE: YES. THEY PASSED.
GORMAN: I MEAN, THAT'S A GREAT TESTAMENT THAT THE BANKS ARE SUFFICIENTLY CAPITALIZED. AND WITH THAT CAME, IN MANY CASES, SIGNIFICANT INCREASES IN DIVIDENDS AND BUYBACKS. SO, YOU KNOW, VERY HEALTHY DYNAMIC. YOU KNOW, DO THE BANKS REPRESENT GOOD VALUE? WE INCREASED OUR DIVIDEND AGAIN, A NUMBER OF BANKS DID. SO THE YIELD NOW ON THESE STOCKS IS AROUND 2%. THE YIELD ALONE, AND THEN THEY'RE TRADING, IN MANY CASES, STILL AT DISCOUNT TO BOOK.
LEE: THERE'S A LOT OF TALK ABOUT THE POTENTIAL FOR DEREGULATION. BUT EVEN ASIDE FROM DEREGULATION, A LOT OF BULLISH BANK INVESTORS WILL MAKE THE CASE THAT IT'S JUST THE NOTION OF A LIGHTER TOUCH WHEN IT COMES TO ENFORCEMENT THAT COULD REALLY HELP THE BANKS. DO YOU FEEL LIKE, UNDER THIS ADMINISTRATION, THE HANDCUFFS ARE OFF, SO TO SPEAK? THAT YOU'RE IN A MUCH MORE FAVORABLE ENVIRONMENT FOR YOUR INDUSTRY?
GORMAN: WELL, NOBODY WANTS THEIR HANDCUFFS TO BE TRULY OFF. I MEAN, THE LAST THING ANYBODY WANTS TO DO, AND CERTAINLY ANY OF MY PEERS WOULD RECOMMEND, IS THAT WE MOVE BACK TO THE DEREGULATION THAT WE HAD PRIOR TO THE FINANCIAL CRISIS. THAT DID NOT END WELL. AND WE'VE HAD A PAINFUL DECADE OF REBUILDING THE BANKS CAPITAL FROM THAT. ON THE OTHER HAND, EIGHT, NINE YEARS OF CONTINUOUS REGULATION, SUPPLEMENTAL LEVERAGE RATIO, LEVERAGE RATIOS, TIER ONE CAPITAL RATIOS, FULLY PHASED – RATIOS AND I COULD GO ON FOREVER. THERE'S BEEN A LOT. AND ABSORB, LET'S CONSUME, TAKE A PAUSE NOW. AND THERE ARE CLEARLY SOME AREAS WHICH NEED TO BE DIALED BACK A LITTLE BIT.
LEE: SO ON THE POINT OF SLR, AND ALSO LCR, LIQUIDITY COVERAGE RATIO, THERE HAS BEEN TALK AMONGST THE ADMINISTRATION AND FED OFFICIALS OF EASING UP ON THOSE TWO RATIOS IN PARTICULAR. AND SECRETARY MNUCHIN HAS SAID THAT EASING UP ON LCR COULD UNLEASH, OR FREE, BILLIONS, IF NOT TRILLIONS, OF DOLLARS IN LIQUIDITY. HOW COULD THAT IMPACT MORGAN STANLEY IN THE BANKING INDUSTRY?
GORMAN: WELL, I THINK IT'S BULLISH FOR THE BANKS, TO BE HONEST. IF YOU LOOK AT – JUST TAKE THE SUPPLEMENTAL LEVERAGE RATIO. IF YOU LOOK AT A LOT OF THE SECURITIES THAT ARE HELD ON THE BALANCE SHEET, THEY'RE NOT RISKY SECURITIES. SO THIS IS NOT WHAT WE SHOULD BE PROTECTING AGAINST. WE SHOULD BE PROTECTING AGAINST THE RISKY ASSETS. SO I THINK SOME OF THE ADJUSTMENTS THAT CAME OUT OF THE WHITE PAPER FROM TREASURY THAT HAVE BEEN PROPOSED, THEY MAKE GOOD COMMON SENSE. AND OTHER REGULATORS AND LEADERS AROUND THE WORLD HAVE BEEN TALKING ABOUT THIS. LISTEN, THE U.S. ECONOMY IS RECOVERING. THE BANKS ARE EXTREMELY WELL CAPITALIZED. WE NOW NEED TO TAKE SOME OF THAT CAPITAL TO HELP GROW AND ACCELERATE ECONOMIC GROWTH IN THIS COUNTRY AND GROW JOBS.
LEE: WHAT WOULD MORGAN STANLEY DO IF THAT HAPPENS? AND I'M ALSO CURIOUS ABOUT THE IMPACT YOU SEE ON THE SYSTEM BECAUSE THERE IS SOME ARGUMENT THAT IF YOU FREE UP THESE BILLIONS, IF NOT TRILLIONS, OF DOLLARS IN LIQUIDITY, THAT IT COULD HAVE AN OFFSETTING IMPACT TO FED TIGHTENING ON MONETARY POLICY.
GORMAN: YEAH, WELL, I HONESTLY DON'T THINK, MELISSA, THERE'S GOING TO BE A DRAMATIC SHIFT. THIS WILL HAPPEN VERY GRADUALLY. THERE WILL BE A REASSESSMENT OF SOME OF THE REGULATORY RULES, WHICH IS COMING. AND CERTAINLY WE WOULD NOT ADVOCATE THROWING OUT DODD/FRANK AND STARTING AGAIN. THERE IS SOME SENSIBLE ADJUSTMENTS. BUT THIS IS GOING TO TAKE PLACE OVER A MEASURED PERIOD OF TIME. I DON'T SEE A FLOOD OF NEW LIQUIDITY COMING INTO THE MARKET.
LEE: AND LAST QUESTION, JAMES, BECAUSE WE'RE JUST ABOUT OUT OF TIME. HOW DO YOU RATE OR GRADE THE ENVIRONMENT FOR BANKS, FOR MORGAN STANLEY, TODAY VERSUS, SAY, TWO, THREE YEARS AGO?
GORMAN: OH, MY GOODNESS. IT'S SO MUCH BETTER. WE'VE DONE THE HARD YARDS, GETTING OUR HOUSES IN ORDER. IN OUR CASE, WE'VE SOLD OR SHUT 10 TO 15 BUSINESSES. WE BOUGHT SMITH BARNEY. WE NOW HAVE $2.2 TRILLION OF CLIENTS MONEY THAT WE'RE MANAGING AROUND THE WORLD. IT IS A PHENOMENAL BUSINESS. MUCH MORE STABLE, WELL CAPITALIZED, STRONG LIQUIDITY AND PRIME FOR GROWTH. NOW, YOU'RE SEEING THAT IN HIGHER RETURN ON EQUITY. YOU'RE SEEING THAT IN SOME OF THE CHANGES TAKING PLACE IN THE REGULATORY REGIME. YOU'RE SEEING THAT IN THE IMPACT OF INTEREST RATES. AND IF WE GET A MORE NORMAL YIELD CURVE, I'M BULLISH ON THE BANK STOCKS. I'M NOT SURPRISED THE MARKET'S REACTING THE WAY IT IS.
LEE: JAMES, THANKS SO MUCH FOR JOINING US. WE APPRECIATE IT.
GORMAN: GREAT, MELISSA. GREAT TO BE HERE.
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