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CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S DAVID FABER SITS DOWN WITH MORGAN STANLEY CEO & CHAIRMAN, JOHN J. MACK, ON CNBC'S "THE CALL" TODAY TODAY

CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S DAVID FABER SITS DOWN WITH MORGAN STANLEY CEO & CHAIRMAN, JOHN J. MACK, ON CNBC'S "THE CALL" TODAY TODAY

WHEN: Today, Thursday, October 16th at 11:22 AM ET

WHERE: CNBC's "The Call"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Morgan Stanley CEO & Chairman, John J. Mack, on CNBC'S "The Call" Today.

All references must be sourced to CNBC.

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(aired live from Kiawah, S.C.)

DAVID FABER: WE'RE JOINED BY MORGAN STANLEY CEO JOHN MACK. OF COURSE BEEN A PRETTY BUSY TIME, I GUESS.

JOHN MACK: TO SAY THE LEAST DAVID IT'S BEEN VERY BUSY.

FABER:I WOULD LOVE YOU TO PUT IN PERSPECTIVE GIVEN ALL YOUR YEARS OF EXPERIENCE, THIS PERIOD VERSUS ANY OTHER YOU MAY HAVE SEEN FROM YOUR EARLY DAYS IN THE BOND MARKET TO WHERE YOU SIT RIGHT NOW.

MACK: WELL, I WISH I COULD. I MEAN, I'VE NEVER SEEN ANYTHING LIKE THIS, ANYTHING CLOSE TO THIS. YOU GO BACK TO '87 AND THE CRASH, IT WAS SUCH A QUICK MOVE DOWN AND THEN BACK UP. IT WASN'T A CREDIT CRISIS. IT WAS REALLY THE MARKET JUST SELLING OFF DRAMATICALLY AROUND THE WORLD. BUT AT THE TIME, IF YOU REMEMBER, THE JAPAN'S DID A LOT TO BUOY THAT MARKET AND CAME IN, BOUGHT THE MARKET, IT CALMED DOWN. IF YOU BOUGHT SECURITIES BACK THEN YOU WERE VERY HAPPY. THEN YOU GO TO THE RECESSIONS IN THE LATE '80s EARLY '90S IT WASN'T LIKE THIS. AND THEN GO TO EITHER CONTAGION IN '98 OR AFTER 9/11, THERE'S NOTHING LIKE THIS. AND I'VE NEVER SEEN ANYTHING LIKE THIS.

FABER: WHAT DISTINGUISHES IT IN YOUR MIND?

MACK: WELL NUMBER ONE IT'S GLOBAL. NUMBER TWO, CREDIT HAS ABSOLUTELY DRIED UP.I THINK THAT'S THE BIGGEST DIFFERENCE. NUMBER THREE, I THINK THE NUMBER OF FUNDS WHO ARE IN THE MARKET, THE VOLATILITY IN THE MARKET IS BEING EXASCERBATED BY A COMBINATION OF VERY ACTIVE MANAGERS, DERIVATIVES AND TOO MUCH LEVERAGE IN THE SYSTEM. AND LOOK, WE ALL HAVE TO TAKE SOME BLAME FOR THAT. AND MORGAN STANLEY CLEARLY WAS LEVERAGED ALONG WITH OUR COMPETITORS. ALL THOSE THINGS TOGETHER, AND THEN YOU COULD SAY IT STARTED WITH THE HOUSING MARKET IN SUBPRIME. BUT IT'S BEEN A TRIGGER EFFECT THAT'S GONE AROUND THE WORLD AND ECONOMIES, EVEN THOUGH CHINA STILL HAS A STRONG ECONOMY IT'S GOING TO SLOW DOWN, CLEARLY RUSSIA HAS SLOWED DOWN. WE'VE SEEN WHAT'S HAPPENED THERE. SO THE BIG DIFFERENCE IS THE GLOBAL NATURE OF IT. AND IT REALLY SHOWS US TODAY THAT SECURITY REGULATION AND COORDINATION HAS TO BE DONE ON A GLOBAL BASIS.I DON'T THINK IT CAN BE LEFT TO BE DONE COUNTRY BY COUNTRY, AND WITH IMF MEETING THIS PAST WEEK I'M SURE SECRETARY PAULSON AND OTHER REGULATORS ARE TALKING ABOUT, ARE GOING FORWARD.

WHAT IS THE FORMAT WE NEED TO MAKE SURE WE HAVE BETTER CONTROL ON THE VOLATILITY AND THE PROBLEMS WE FACE FINANCIAL MARKETS AND GLOBAL TRADING.

FABER: YOU MENTIONED -- ARE YOU SAYING YOU NEED SOME SORT OF NEW OVERALL GLOBAL REGULATORY BONDING?

MACK: I THINK YOU DO. I MEAN 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 IN ONE COUNTRY AND A DIFFERENT SET SOMEWHERE ELSE. ALSO I THINK, IN TRYING TO STAVE OFF SOME TYPE OF VOLATILE REACTION TO WHAT MAY HAPPEN IN ONE COUNTRY, I THINK GLOBAL REGULATORY EITHER OVERSIGHT COORDINATION IS IMPORTANT.NOW THERE'S A POSSIBILITY THIS CAN BE DONE THROUGH A COORDINATED EFFORT AND NOT A SET GROUP OF RULES.

FABER: WE NEED SOME SORT OF COORDINATION.

MACK:EXACTLY.

FABER: YOU MENTIONED DELEVERAGING. THAT PROCESS CONTINUES. IT HAS BEEN PAINFUL. IT HAS TAKEN QUITE A WHILE. MANY SAY WE STILL HAVE QUITE A WHILE TO GO. DO YOU AGREE?

MACK: WELL, I DO THINK THERE'S MORE DELEVERAGING TO BE DONE. I MEAN IF YOU GO BACK TO MORGAN STANLEY A YEAR AGO, WE WERE PROBABLY RUNNING A LEVERAGE AROUND 30, 31 TIMES.

FABER: 31 TIMES. WHEN YOU HEAR YOURSELF SAY THAT DO YOU THINK IN RETROSPECT, WHAT WAS I DOING?

MACK: WELL IN RETROSPECT YOU CAN SAY THAT ABOUT A LOT OF THINGS. BUT NOW WE'RE SLIGHTLY BELOW 20 TIMES LEVERAGE AND WITH THE INJECTION OF MONEY COMING FROM MITSUBISHI, THE MONEY THAT EVENTUALLY WILL BE COMING FROM THE GOVERNMENT YOU'RE GOING TO SEE US IN THE MID-TEENS ON A GROSS. THAT DELEVERAGING THAT IS TAKING PLACE, I THINK IT'S HAPPENING CLEARLY AT OTHER FIRMS BUT STILL MORE TO BE DONE.IF YOU LOOK AT THE EUROPEAN BANKS, SOME OF THOSE BANKS ON A GROSS BASIS ARE OVER 40 TIMES LEVERAGE. SO THERE'S MORE WORK TO BE DONE, CLEARLY IN DELEVERAGING. BUT IT'S NOT JUST INVESTMENT BANKS AND THE BANKS AND THE BANK HOLDING COMPANIES THAT WE ARE NOW. IT'S ALSO A LOT OF FUND MANAGERS. AS YOU KNOW, THEY'VE USED LEVERAGE TO A LARGE EXTENT AND THEY'VE HAD SOME OUTSTANDING RETURNS AND WE'RE ALL LEARNING THAT LEVERAGE WORKS BOTH WAYS.

FABER: WE'VE LEARNED THAT VERY PAINFULLY. WE CONTINUE TO.YOU SEEM TO BE SAYING YOU DO EXPECT THERE'S MORE PAIN AHEAD IN TERMS OF AT LEAST AS THESE LEVERAGE RATIOS COME DOWN NOT JUST FOR THE COMMERCIAL BANKS AND INVESTMENT BANKS BUT FOR THE EUROPEAN BANKS AND AS WELL FOR THE HEDGE FUNDS.

MACK:I THINK SO. LISTEN, PEOPLE ARE SCARED. AND WHEN THEY ARE SCARED THEY WANT TO GO TO CASH, THEY WANT TO DELEVERAGE AND THEY ARE DOING THAT. BUT, LOOK, WHEN WE MET ON MONDAY WITH SECRETARY PAULSON AND CHAIRMAN BERNANKE, IT'S CLEAR THEY SEE THINGS, AT LEAST FROM MY PERSPECTIVE, THAT WE'RE NOT AWARE OF AND THEY HAVE CONCERNS, AND YOU GOT TO GIVE THEM THE BENEFIT OF THE DOUBT. I THINK THEY HAVE DONE A GOOD JOB. YOU CAN YOU GO BACK AND SAY SHOULD THEY HAVE DONE THINGS DIFFERENTLY/

FABER: WELL THEY SHOULDN'T HAVE LET LEHMAN GO BANKRUPT, SHOULD THEY HAVE?

MACK: WELL LOOKING BACK YOU COULD SAY THAT. AT THE TIME FOR WHATEVER REASONS I THINK THEY HAD SOUND REASONS. BUT IF YOU CAN PLAY THE FILM BACK YOU WOULD ALWAYS MAKE SOME CHANGES. THEY HAVE BEEN SUPERB I THINK IN HELPING MANAGE THROUGH THIS CRISIS.

FABER: WHAT WAS IT LIKE WHEN YOU WERE SITTING THERE ON MONDAY AT 3:00 P.M. CALLED FOR A MEETING? I GUESS YOU DIDN'T NECESSARILY KNOW WHAT WAS GOING TO HAPPEN.

MACK: NO, WE DIDN'T

FABER: AND THESE GUYS TELL YOU WE'RE MAKING YOU AND OFFER YOU CAN REFUSE.

MACK:WELL, LISTEN, AGAIN, IT WAS A VERY BROAD DESCRIPTION OF A NUMBER OF THINGS. THE PREFERRED WAS JUST ONE PIECE OF IT.

THERE WERE GUARANTEES ON DEPOSITS. THERE WAS GUARANTEES ON SOME OF THE DEBT, AND THE RESTRUCTURING WOULD TAKE PLACE THERE. SO, IT WAS VERY BROAD BASED, AND I THINK AS A GROUP, PEOPLE REALLY THOUGHT IT WAS THE RIGHT THING TO DO AND WE'RE HAPPY THAT IT WAS MUCH BROADER THAN JUST FOCUSED ON THE BANKS, IT WAS REALLY FOCUSED ON SUPPORTING THE SYSTEM. AND WITH THE NON-PLAYERS AT THE TABLE, THE WHOLE ATTEMPT IS TO MAKE SURE THAT CREDIT STARTS MOVING AGAIN. IF YOU GO BACK, AND I DON'T KNOW THE EXACT NUMBERS RIGHT NOW, BUT EARLY IN THE WEEK IT WAS PROBABLY $400 BILLION THAT THE FEDERAL RESERVE ON DEPOSIT FOR THE BANKS. NORMALLY THAT MONEY IS LENT TO OTHER BANKS AND THE SYSTEM WORKS. BUT BECAUSE OF FEAR PEOPLE WERE SAYING, BANKS WERE SAYING I RATHER HAVE THAT MONEY IN THE FEDERAL RESERVE GETTING VERY LOW INTEREST RATE THAN TAKING THE RISK OF LENDING IT TO SOME OTHER BANK. WE NEED TO UNLOCK THAT. I THINK THE MOVES THAT WERE MADE BY THE SECRETARY AND THE CHAIRMAN REALLY FOCUSED ON THAT.

FABER: TO WHAT EXTENT DO WE HAVE A GUARANTEE THAT MORGAN STANLEY OR J.P. MORGAN OR CITI ARE NOT GOING TO TAKE THIS MONEY AND DO THE VERY SAME THING? ARE YOU GOING TO ULTIMATELY PUT IT OUT INTO THE SYSTEM OR ARE YOU GOING HAPPILY TO SIT ON IT AND BRING YOUR LEVERAGE RATIO DOWN?

MACK: WELL CLEARLY, WE'RE GOING TO BRING OUR LEVERAGE RATIOS DOWN A LITTLE MORE. BUT AS FAR AS SITTING ON IT, I THINK WHAT WE NEED IS CONFIDENCE IN THE SYSTEM. AND FOR THESE BANKS TO BE CAPITALIZED THAT WELL, THEY ARE NOT GOING TO GO OUT AND PLAY BIG CASINO WITH THAT MONEY. AND FROM OUR PERSPECTIVE AND MY FRIEND LLOYD BLANKFEIN OVER AT GOLDMAN SACHS, YOU KNOW, WE'VE JUST BECOME A BANK HOLDING COMPANY. WE HAVE A NEW REGULATOR WE TALK TO DAILY, SOMETIMES MORE THAN ONCE A DAY.

WITHOUT QUESTION. THAT'S WHY. BUT THIS IS NOT GOING TO BE CHIPS ON THE TABLE TO KIND OF ROLL IT ONE MORE TIME AND SEE HOW PEOPLE DO. THIS IS ABOUT BRINGING STABILITY BACK IN THE SYSTEM, IT'S ABOUT MAKING SURE THAT BORROWERS, EITHER SMALL BUSINESS OR INDIVIDUALS HAVE ACCESS FOR FUNDS. AND TO GET THIS ECONOMY GOING. WE NEED TO MAKE SURE THAT A SMALL BUSINESS PERSON OR INDIVIDUAL CAN BORROW MONEY, AND THAT THEY HAVE THE CONFIDENCE THAT THEY CAN TAKE SOME OF THE BUSINESS RISKS THEY HAVE TAKEN IN THE PAST.

FABER: WE TEND FOCUS ON THE EQUITY MARKETS BUT, OF COURSE, THIS IS ALL ABOUT THE CREDIT MARKETS AND AS YOU SAY CONFIDENCE.

IT'S ONLY BEEN FEW DAYS SINCE YOU SAT DOWN AT THAT TABLE. YOU HAVEN'T GOTTEN THE MONEY YET. NONETHELESS HOW QUICKLY DO YOU THINK THIS WILL HELP TO UNLOCK THE CREDIT MARKETS AND ARE WE STARTING TO SEE ANY EFFECT FROM IT? I KNOW LIBOR HAS BEEN CREEPING DOWN A BIT. BUT WHAT'S YOUR SENSE RIGHT NOW IN TERM OF THE CREDIT MARKET?

MACK: WELL,THERE'S SOME PROGRESS. CLEARLY NOT AS MUCH AS THE TREASURY, THE FEDERAL RESERVE WOULD LIKE. THERE'S BEEN SOME PROGRESS. I THINK IT TAKES TIME. YOU MENTIONED LEHMAN BROTHERS. LOOK, A LOT OF IT HAS LOCKED UP THE SYSTEM AND THAT WILL TAKE SOME TIME.WE'RE BEGINNING TO WORK THROUGH IT. AND THERE'S A LOT OF FOCUS JUST ON HOW DO WE OPEN THAT UP AGAIN. OPEN IT UP. OPEN THE CREDIT MARKETS UP. SO ONE OF THE ISSUES HAVE BEEN COMMERCIAL PAPER AND THE MONEY MARKET FUNDS. WHERE THERE'S PROGRESS BEING MADE ON THAT BUT NOT OVERNIGHT. WE'RE MAKING PROGRESS.

FABER: MONTHS STILL?

MACK: YEAH. LISTEN, I THINK WE'RE IN FOR A ROCKY ROAD FOR A WHILE.

FABER: ARE WE GOING TO HAVE A RECESSION?

MACK: I THINK WE'RE IN A RECESSION. BUT I WOULD HAVE SAID THAT TO YOU NINE MONTHS AGO TOO.

FABER: DO YOU THINK IT'S GOING TO BE A PARTICULARLY DEEP RECESSION, ONE THAT WE HAVEN'T SEEN IN QUITE SOME TIME?

MACK: WELL EVERYTHING INDICATES THAT'S WHAT IT WILL BE. BUT AGAIN IT'S TO EARLY TO TELL.

FABER: WHEN WILL WE KNOW?

MACK: WELL,I GUESS WHEN YOU STOP REPORTING ABOUT IT, WE'LL KNOW. WE DON'T KNOW THAT YET UNTIL WE GET MORE DATA. JUST THINK ABOUT IT. A MONTH AGO, IF OIL PRICES MOVED DOWN WE WOULD LOOK AT IT AS A BULLISH SLIDE. AND 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'S A WORLDWIDE RECESSION. SO, WE HAVE EVERY INDICATION THAT WE'RE HAVING A DEEP RECESSION. BUT TO GIVE YOU ANY SPECIFIC ANSWER IN THREE MONTHS OR EIGHT MONTHS WILL TAKE A WHILE.

FABER: AND GIVEN YOUR VIEW OF THE ECONOMY AND MORGAN STANLEY, YOU'VE TAKEN IN 9 BILLION, YOU'VE GOT ANOTHER 10 BILLION COMING IN, HOPEFULLY YOU HAVE QUASHED ALL THOSE RUMORS OUT THERE. I WOULD ASSUME YOU HOPE THAT'S THE CASE. WHAT ABOUT THE STATE OF THE FIRM ITSELF? IN A VERY DIFFICULT ENVIRONMENT WHERE THERE'S VERY LITTLE MERGERS AND ACQUISITIONS. VERY LITTLE EQUITY UNDERWRITING, VERY LITTLE BOND UNDERWRITING. THE MORTGAGE BUSINESS IS SORT OF GONE.

MACK: WELL, FIRST BEFORE I ANSWER THAT QUESTION. LET'S JUST TALK ABOUT RUMORS, DAVID. I THINK THERE'S BEEN A REAL DISSERVICE NOT JUST ABOUT MORGAN STANLEY BUT THE NUMBER OF RUMORS THAT ARE EITHER ON TELEVISION OR IN THE PRESS, REALLY ADD KIND OF A SENSE OF DESPARATION AND FEAR TO THE MARKET WE JUST DON'T NEED. I'M ALL FOR THE FACTS. AND I JUST FIND IT UNFORTUNATE THAT SO MANY HEADLINES, SO MANY RUMORS ARE GENERATED. NOW, I'LL MOVE ON TO ANSWER YOUR QUESTION.

FABER: LET ME STOP YOU ON THAT BECAUSE YOU'VE, YOU NOW ARE KNOWN AS SOMEBODY WHO COMBATS SHORT SELLERS EVEN THOUGH MANY OF THEM ARE AMONGST YOUR CLIENTS IN TERMS OF THE HEDGE FUNDS THAT YOU SERVICE OUT OF YOUR PRIME BROKERAGE OPERATION. DO YOU THINK SHORT SELLING IS BAD?

MACK: NO. AGAIN, LET'S BE CLEAR. AS YOU KNOW, THREE OR FOUR YEARS AGO, I SAT WITH ONE OF MY GOOD FRIENDS ART SANDBERG AT PEQUOT, WHICH IS AN OUTSTANDING HEDGE FUND.I BELIEVE IN SHORT SELLING. I BELIEVE IN IT TODAY. I THINK, YOU KNOW, IT'S A WAY THAT PEOPLE CAN EXPRESS THEIR VIEW ON A COMPANY. THEY DON'T HAVE TO BUY IT. THEY CAN SHORT. I'M ALL FOR THAT.BUT I THINK IN EXTREME CIRCUMSTANCES AND THAT'S WHAT WE'VE BEEN IN FOR THE LAST THREE TO SIX WEEKS, ESPECIALLY IN THE FINANCIAL SERVICE AREA, WHERE SHORT SELLERS ARE NOT JUST SELLING STOCK, THEY ARE PUTTING PRESSURE ON CDS SPREADS WHICH EXASCERBATES THE POWER, I WAS TALKING TO SIDNEY TURELL EARLIER AND I SAID TO SIDNEY, IT'S LIKE A SHORT SELLER ON STEROIDS. UNTIL WE GET A BETTER UNDERSTANDING OF THE IMPACT OF THE CDS SPREADS AND THE SHORT SELLERS BEING COMBINED, I THINK IT'S PRUDENT TO HAVE SOME KIND OF CONTROLS ON IT. I WOULD LOVE TO HAVE THE POWER THAT EVERYONE SAYS I DO THAT I DID THIS BUT THE FSA DID THIS BEFORE S.E.C. DID, ALL OF MY FELLOW CEOs THAT I TALKED TO WERE IN FAVOR OF IT. I SAW IT IN THE "WALL STREET JOURNAL" ABOUT TWO WEEKS AGO, LLOYD CAME OUT, THERE WAS AN AGREEMENT WITH ME ON IT. NOW I'M HAPPY TO TAKE THE HEAT AND I'VE TAKEN THE HEAT BUT I'M DOING WHAT I THINK IS RIGHT FOR THE FINANCIAL SYSTEM AND THERE'S NO QUESTION IT PUTS SOME OF THESE FUNDS AT A DISADVANTAGE. THAT IS NOT WHAT I WAS TRYING TO DO. I BELIEVED THE SYSTEM WAS IN DANGER AND I THOUGHT IT WAS THE RIGHT THING TO DO.

FABER: LET'S TALK, AS WE END UP HERE, ON MORGAN STANLEY ITSELF. A CHALLENGING ENVIRONMENT HERE AND I'M JUST WONDERING WHEN YOU LOOK AT THE EARNINGS POWER OF THIS BUSINESS, IT DOESN'T LOOK PARTICULARLY GOOD FROM MY VANTAGE POINT GIVEN THE ENVIRONMENT WE'RE IN AND CONTINUING IN.

MACK: WELL IN THE SHORT RUN YOU'RE EXACTLY RIGHT. IT'S PRETTY DIFFICULT TO DO A TRANSACTION. IF YOU HAD TALKED TO MY CEO IN CHINA, WADE CHRISTIANSON, YOU WOULD SAY THERE'S A LOT OF BUSINESS LINED UP BUT THE MARKETS ARE NOT ALLOWING YOU TO DO THAT.IF YOU GO TO EUROPE YOU'RE SEEING THE SAME THING. WE HAVE ORDER FLOW, TRANSACTIONS THAT WE WANT TO DO AND, AGAIN, COME TO THIS COUNTRY THERE'S FINANCING THAT NEEDS TO BE DONE, ESPECIALLY HOW PEOPLE HAVE BEEN LOCKED OUT OF THE CREDIT MARKET. SO WHAT WE NEED IS STABILITY, AND WITH THAT YOU WILL SEE A COMBINATION OF MERGERS, YOU'LL SEE A BIG ISSUANCE OF DEBT AND YOU'LL SEE THE EQUITY MARKET ISSUANCE COME BACK. THINK ABOUT IT.

FABER: THAT'S GOING TO TAKE TIME, ISN'T IT?

MACK: IT WILL TAKE TIME. BUT STABILITY CAN HAPPEN PRETTY QUICKLY. NOW IT'S GOING TO TAKE TIME FOR THE MARKETS TO RECOVER.

BUT WHEN YOU THINK ABOUT, IF YOU ARE X, Y, Z CORPORATION AND YOU'VE BEEN LOOKING AT DOING AN ACQUISITION OR DOING A ROLL UP STRATEGY, IT'S ONE OF THE FEW TIMES IN THE LAST THREE OR FOUR YEARS FOR A LOT OF DIFFERENT REASONS, PRIVATE EQUITY BECAUSE OF FINANCING BEING TIGHT HAS BACKED AWAY. NOW THEY WILL BE IN THE MARKET AND I'M SURE THEY WILL HAVE THE OPPORTUNITY DO SOME GREAT INVESTING. BUT IF YOU ARE THE CEO OF SOME COMPANY, HERE'S A CHANCE THAT YOU CAN BUILD A STRATEGIC FOOTPRINT THAT'S MUCH BROADER AND BIGGER. YOU'RE GOING TO SEE A LOT OF ACTIVITY I BELIEVE IN THAT MARKET.

FABER: IN 2009?

MACK: PROBABLY IN 2009. BUT, AGAIN, MARKETS CAN TURN PRETTY QUICKLY. AND THIS IS ABOUT CONFIDENCE. AND WE NEED TO GET THE CONSUMER BACK INTO THE HOUSING MARKET. WE NEED TO STOP THE DETERIORATION OF HOUSING PRICES.

FABER: WE DO. THE ONE THING THE FED IS NOT ABLE TO DO IS SAY YOU CAN'T SELL YOUR HOUSE MORE THAN YOU BOUGHT IT FOR.

MACK: THAT'S RIGHT. I CAN'T ANSWER THAT ONE.

FABER: IN TERMS OF MORGAN STANLEY'S PRIME BROKERAGE BUSINESS, WE TALKED A GOOD DEAL ABOUT IT, WHEN FEAR WAS AT ITS HIGHEST LEVEL, THERE A LOT OF PEOPLE WERE PULLING. WHERE DOES THAT STAND, IS THAT AN IMPORTANT BUSINESS FOR YOU OR IS THAT ONE THAT SORT OF IF IT WENT TO THE WAYSIDE WOULD NOT BE OF GREAT IMPORTANCE?

MACK: NO IT IS AN IMPORTANT BUSINESS. AGAIN, THE LAST LOT OF FEAR. WE'VE TALKED ABOUT LEHMAN AGAIN AND A LOT OF THESE HEDGE FUNDS HAD THEIR REALLY MONEY LOCKED UP WHERE THEY COULDN'T GET IT OUT.

FABER: THEY STILL DO AT LEHMAN INTERNATIONAL.

MACK: THAT'S EXACTLY RIGHT. SO I CAN'T BLAME THEM FOR TAKING THEIR MONEY OUT. BUT THE OTHER SIDE OF THAT IS NOW WITH OUR INVESTOR OUT IN JAPAN, MONEY IS COMING BACK IN. WE'VE HAD A NUMBER OF FUNDS WHO HAVE TAKEN SOME OF THE MONEY, IN SOME CASES TOOK ALL THEIR MONEY, HAVE COME BACK AND THE ORDER FLOW THEY WERE GETTING FROM THEM HAS BEEN VALUABLE, VERY PROFITABLE ORDER FLOW. SO WE'RE PRETTY COMFORTABLE WITH IT. WHAT WE NEED TO DO, LOOKING FORWARD IS, WHAT'S THE RIGHT SIZE FOR ANY FIRM TO HAVE INVESTING IN THE PRIME BROKERAGE BUSINESS? BUT WITHOUT QUESTION, THOSE PEOPLE WHO PULLED OUT ARE COMING BACK.

FABER: WHAT DOES THAT MEAN THE RIGHT SIZE? DO YOU MOVE IT UP? DO YOU WANT ONLY MORE SIGNIFICANT CLIENTS? I'VE BEEN HEARING THAT'S BECOMING MORE THE RULE THAN THE EXCEPTION IN THE INDUSTRY. AS THE HEDGE FUND INDUSTRY, OF COURSE, GOES THROUGH ENORMOUS CHANGE.

MACK: I THINK THAT'S A STORY IN ITSELF. SOME OF MY FRIEND IN THAT COMMUNITY ARE SAYING BY YEAR END YOU'RE GOING TO SEE THE NUMBER OF FIRMS ON THE HEDGE FUND AREAS SHRINK. I'VE HEARD AS LARGE AS MAYBE 30%. SO IT'S GOING TO BE RESIZED ANYWAY AND WHEN IT DOES WE NEED TO RESIZE OUR PRIME BROKERAGE BUSINESS.

FABER: WHAT ABOUT THE -- IN TERMS OF MORGAN STANLEY AND WRITEDOWNS WHERE ALL OF THIS STARTED AND CONCERN ABOUT YOUR PORTFOLIO, DO YOU SEE FURTHER MARKS COMING, OR ARE YOU VERY COMFORTABLE AT THIS POINT WHERE YOUR MARKS ARE? AND WHERE YOUR ASSET VALUES ARE?

MACK: WELL, AGAIN, DAVID, WE MARK TO MARKET, AND AT ANY POINT IN TIME IF YOU ASKED ME DID WE MARK TODAY AND WE DID, I'M COMFORTABLE WITH THAT MARK. BUT IF ASSET PRICES CONTINUE TO DETERIORATE, WITHOUT QUESTION WE'RE GOING TO HAVE TO MARK DOWN MORE. NOW THE OTHER SIDE OF THAT IS WITH OUR RISK MANAGERS, KINDER RED IS OUR CHIEF RISK MANAGER, WE'VE DONE A NUMBER OF THINGS TO HEDGE THAT ON THE OTHER SIDE. SO, THE REAL STORY IS IF PRICES MOVED OUT, CLEARLY WE'LL MAKE MARKS. BUT AT THE SAME TIME WE'LL MAKE MONEY ON OUR HEDGES.

FABER: AS WE END UP HERE, I DON'T KNOW IF IT'S BEEN YOU, JOHN, BUT THE MARKET HAS COME BACK A BIT SINCE WE STARTED SPEAKING.

MACK: WELL LOOK DAVID WHY DON'T WE JUST STAY ON THE AIR FOR A WHILE IF THAT'S WHAT IT TAKES.

FABER: WELL YOU KNOW IT IS IMPORTANT THAT PEOPLE LIKE YOU DO COME OUT. WE HAVEN'T HEARD THAT MUCH FROM OUR LEADERS OF THESE COMPANIES. SO WE DO APPRECIATE YOU ACTUALLY MAKING A DECISION TO DO THAT. I WOULD LIKE TO END WHERE WE SORT OF STARTED ON THE OVERALL, YOU SAID THIS IS AN UNPRECEDENTED PERIOD. TIME IS WHAT IT'S GOING TAKE RIGHT TO ULTIMATELY GET US OUT OF HERE. GIVE ME SOME IDEA, THOUGH, OF WHERE YOU SEE THINGS PROGRESSING IN TERMS OF 2009, GIVEN ALL THE THINGS YOU SAID ABOUT THE ECONOMY AND THE CREDIT CRISIS, INTO 2010.

MACK: WELL CLEARLY 2009 IS GOING TO BE A SLOW PERIOD OF GROWTH FOR THE UNITED STATES AND THE WORLD. WE'RE BUILDING THAT FOUNDATION, AS WE SPEAK, IN TRYING TO FREE UP CREDIT. BUT FOR ME TO BE, YOU KNOW, TO BE ABLE TO LOOK INTO A CRYSTAL BALL AND TELL YOU, I JUST DON'T KNOW. BUT IT'S GOING TO BE AT LEAST A YEAR, IT COULD BE LONGER THAN THAT. IT COULD GO INTO 2010.

FABER: DO YOU NEED LIKE SO MANY OF YOUR PEERS IN THE INDUSTRY TO CUT MORE JOBS?

MACK: YOU KNOW ANY TIME YOU TAKE A BUSINESS DAVID, THAT'S BEEN RUNNING AT LET'S SAY 30 TIMES LEVERAGE AND YOU TAKE IT DOWN TO 16 OR 17 TIMES, THAT CHANGES THE NATURE OF YOUR BUSINESS. AND WE HAVE TO LOOK AT THAT AND RESIZE FOR THAT. BUT THE OTHER SIDE OF IT IS CLEARLY FOR MORGAN STANLEY, WE HAVE 600 BILLION IN THE ASSET MANAGEMENT BUSINESS, THE BUSINESS WE WANT TO CONTINUE TO BUILD AND GROW, WE HAVE CLOSE TO 9,000 FAs IN OUR RETAIL BUSINESS AND GIVE GREAT ADVICE TO OUR CLIENTS. WE WANT TO GROW THAT BUSINESS.SO THERE'S A BALANCE BETWEEN, IT'S NOT JUST ABOUT THE INSTITUTIONAL EQUITY AND FIXED INCOME BUSINESS AND THE INSTITUTIONAL INVESTMENT BANKING BUSINESS WE WANT TO WORK ON THESE OTHER AREAS TOO.

FABER: THANK YOU.

MACK:MY PLEASURE.

FABER: FOR ALL OF YOUR TIME. JOHN MACK, CEO OF MORGAN STANLEY.





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