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CNBC TRANSCRIPT: FIRST ON CNBC: CNBC'S DAVID FABER SPEAKS WITH MORGAN STANLEY CEO JAMES GORMAN TODAY ON CNBC'S "FAST MONEY HALFTIME REPORT"

WHEN: Today, Wednesday, October 19th

WHERE: CNBC's "Fast Money Halftime Report"

Following is the unofficial transcript of a FIRST ON CNBC interview with Morgan Stanley CEO James Gorman on CNBC's "Fast Money Halftime Report." All references must be sourced to CNBC.

Morgan Stanley CEO on Q3 Earnings

SCOTT WAPNER: WELCOME BACK TO THE "FAST MONEY HALFTIME REPORT." MOVING ON, TAKE A LOOK AT SHARES OF MORGAN STANLEY RIGHT NOW, TRADING HIGHER AFTER THE COMPANY POSTED THIRD-QUARTER EARNINGS THIS MORNING. NO ONE BETTER TO GIVE US A DEEPER READ ON THAT EARNINGS REPORT THAN THE BOSS HIMSELF. CNBC'S DAVID FABER IS STANDING BY WITH MORGAN STANLEY CEO JAMES GORMAN IN A "FIRST ON CNBC" INTERVIEW. DAVID?

DAVID FABER: THANK YOU VERY MUCH SCOTT. AS YOU SAID, OF COURSE WE ARE HERE AT MORGAN STANLEY'S HEADQUARTERS IN MIDTOWN MANHATTAN WITH JAMES GORMAN, CEO, SOON TO BE AS WELL, CHAIRMAN OF MORGAN STANLEY. MR. GORMAN, MANY BELIEVE IT WAS A GOOD QUARTER. IT WAS A GOOD QUARTER FOR MORGAN STANLEY VERSUS THE ESTIMATES AND VERSUS YOUR COMPETITORS.

JAMES GORMAN: SURE.

FABER: NONETHELESS, WHEN YOU BACK OUT THESE ANNOYING DVA CHARGES, FIRM EARNED ABOUT TWO CENTS A SHARE. WHEN DOES MORGAN STANLEY GET BACK TO EARNINGS THAT PEOPLE CAN FEEL REALLY GOOD ABOUT IN TERMS OF ACTUAL GROWTH?

GORMAN: I THINK FIRSTLY, DAVID, GREAT TO HAVE YOU HERE. IT'S NICE TO BE PROFITABLE IN AN ENVIRONMENT LIKE THIS. SO LET'S JUST START THERE. THE INDUSTRY OBVIOUSLY HAS BEEN UNDER TREMENDOUS STRESS, WHAT'S BEEN GOING ON IN EUROPE. SO TO SEE THE PROFIT WE SAW AND SEE THE PERFORMANCE ACROSS A NUMBER OF THE BUSINESSES, THE UNDERLYING STRENGTH, ACTUALLY I THOUGHT IT WAS PRETTY ENCOURAGING.

FABER: ENCOURAGING BUT THE ENVIRONMENT --

GORMAN: SURE.

FABER: PEOPLE ARE HAVING SUCH A DIFFICULT TIME UNDERSTANDING WHAT WILL BE THE NORMALIZED ENVIRONMENT AND WHEN WILL WE ULTIMATELY SEE IT AND WHAT WILL A FIRM LIKE MORGAN STANLEY, WHICH HAS CHANGED RATHER DRAMATICALLY OVER THE LAST FEW YEARS, ACTUALLY LOOK LIKE AND BE ABLE TO GENERATE IN TERMS OF REVENUES AND PROFITS?

GORMAN: FIRSTLY, WE'RE GOING THROUGH PROBABLY THE MOST IMPORTANT CHANGE IN THE LAST 50 YEARS IN FINANCIAL SERVICES, AT LEAST THE LAST 50 YEARS. AND THERE'S A LOT OF REGULATION -- IN FACT, I'M SURE WE'LL TALK ABOUT DODD/FRANK AND VOLCKER AND SOME OF THE OTHER CHANGES THAT ARE STILL COMING. ORGANIZATIONS LIKE US, WE'RE A COMPLEX LARGE ORGANIZATION. 60,000 PEOPLE, RANGE OF BUSINESSES AROUND THE GLOBE. WE'RE ADJUSTING, CHANGING, REFINING THE BUSINESS MODEL. NOW WE HAVE MADE A LOT OF CHANGES IN THE LAST THREE YEARS. WE HAVE DOUBLED OUR LIQUIDITY. WE HAVE HALVED LEVERAGE. WE HAVE DOUBLED CAPITAL. WE HAVE BOUGHT THE INTEREST IN SMITH BARNEY AND WE'VE SOLD OR SPUN OFF ALL OF OUR PROPRIETARY TRADING BUSINESSES. AND FINALLY, WE HAD MUFG TAKE A 22% STAKE IN OUR FIRM. GROUND BREAKING TRANSACTION --

FABER: RIGHT, MITSUBISHI. RIGHT.

GORMAN: SO, LOTS OF CHANGE IN A VERY CONDENSED PERIOD. THE TYPE OF CHANGE THAT MIGHT HAPPEN IN AN INSTITUTION LIKE THIS OVER A 20 OR 30-YEAR PERIOD HAS HAPPENED OVER A TWO TO THREE-YEAR PERIOD. NOW WE'RE COMING OUT OF THAT. WHAT I'M FOCUSED ON IS THE STRENGTH OF OUR CLIENT BUSINESSES, HOW WE'RE USING THE BALANCE SHEET THAT WE CURRENTLY HAVE, WHICH IS SMALLER THAN IT WAS OBVIOUSLY, PRE-CRISIS. AND FROM THAT GENERATING THE KINDS OF RETURNS THAT SHAREHOLDERS EXPECT.

FABER: WHAT KIND OF RETURNS CAN YOU ULTIMATELY ANTICIPATE GENERATING FOR THOSE SHAREHOLDERS?

GORMAN: WE'VE SAID OVER THE COURSE OF A NORMAL CYCLE AND IT REMAINS TO BE SEEN WHETHER WE'RE IN SOME SORT OF SECULAR CHANGE--

FABER: WHEN WILL WE GET INTO A NORMAL CYCLE I GUESS BECOMES THE QUESTION THOUGH. YOU MENTIONED THE REGULATORY CHANGES THAT ARE OCCURRING THAT YOU'RE ADJUSTING TO, NOT TO MENTION OF COURSE TURMOIL IN EUROPE THAT MAY BE WITH US FOR SOME TIME. WHEN DO WE SEE NORMAL AGAIN?

GORMAN: HONESTLY, I THINK IT'S A COUPLE OF YEARS. LOOK AT THE MAJOR ECONOMIES AROUND THE WORLD. JAPAN HAS BEEN THROUGH, OBVIOUSLY, A TREMENDOUS TRAGEDY WITH THE EARTHQUAKE, TSUNAMI AND NUCLEAR FALLOUT FROM THAT. EUROPE IS UNDER EXTRAORDINARY STRESS AT THE MOMENT AS THEY ARE ADJUSTING TO THE FINANCIAL CRISES OF MANY OF THE PERIPHERAL COUNTRIES. AND THE UNITED STATES IS SHOWING MODEST GROWTH AT BEST. SOMEWHERE BETWEEN 2 AND 3%. SO WE HAVE PLENTY OF AREAS OF THE DEVELOPED PART OF THE WORLD UNDER STRESS, OFFSET, FORTUNATELY, BY THE DEVELOPING ECONOMIES WHICH HAVE CONTINUED TO SHOW RESILIENCE AND STRENGTH IN COMMODITIES AND IN OTHER AREAS. WE NEED TO GET THROUGH THE POLITICAL CYCLE HERE, IN CHINA, IN EUROPE OVER THE NEXT 12 MONTHS. WE NEED TO GET THROUGH THE FISCAL INSTABILITY THAT IS IN EUROPE AND HOPEFULLY BEING WORKED OUT BEGINNING THIS WEEKEND. WE NEED TO GET THROUGH THE BANK REFORM BOTH OF THE BANKS' OWN BALANCE SHEETS AND OF THE REGULATION OF THOSE INSTITUTIONS. THIS COLLECTION OF ACTIVITIES NEEDS TO COME TOGETHER OVER -- I THINK IT WILL BE 12 TO 24 MONTHS BEFORE WE HAVE REAL CLARITY.

FABER: ONE THING YOU'VE DONE OVER THE LAST COUPLE OF YEARS, IT APPEARS TO ME AT LEAST, IS TAKEN RISK OUT OF YOUR BUSINESS, WHICH, OF COURSE, IN TOUGH TIMES IS A VERY GOOD THING. BUT WHEN THINGS BECOME NORMALIZED AGAIN, ARE THE RETURNS THAT SHAREHOLDERS PERHAPS HAD ANTICIPATED FROM THE OLD MORGAN STANLEY NO LONGER GOING TO BE THERE GIVEN THE RISK PROFILE THAT THE FIRM DOES SEEM TO HAVE BEEN DIMINISHED?

GORMAN: I DESCRIBE IT A LITTLE DIFFERENTLY, DAVID. I THINK WE'VE TAKEN OUT THE END POINTS OF THE RISK. WE'VE TAKEN OUT VERY CONCENTRATED PROP INVESTING AND VERY CONCENTRATED PROP TRADING. SO FOR EXAMPLE, WE HAVE A LARGE MERCHANT BANK. WE HAVE MUCH LESS CAPITAL TIED UP IN ANY INDIVIDUAL INVESTMENT SO THAT WE DON'T HAVE A REPEAT OF THE KINDS OF INVESTMENT DISASTERS THAT FRANKLY HAPPENED THREE AND FOUR YEARS AGO. ON THE PROP TRADING SIDE, WE'VE SHUT DOWN OUR PROP TRADING BIZ. YOU HAVE A SMALL NUMBER OF INDIVIDUALS PUTTING AT RISK A LARGE PERCENTAGE OF THE FIRM'S CAPITAL. BUT INSTEAD, WE HAVE REDIRECTED THE BALANCE SHEET TOWARDS OUR CLIENT ACTIVITIES. WE STILL RUN AN $800 BILLION BALANCE SHEET. WE ARE NOT A RISKLESS ORGANIZATION.

FABER: SURE. ABOUT 13 TIMES LEVERED WHICH AGAIN IS DOWN, BUT STILL SOMETHING. WEALTH MANAGEMENT IS A VERY IMPORTANT PART OF YOUR BUSINESS. AND THAT WOULD SEEM AS A MUCH MORE PREDICTABLE BUSINESS IN SOME WAYS.

GORMAN: SURE. I THINK INVESTORS WANT TO SEE AN INSTITUTION THAT CAN TAKE ADVANTAGE OF THE UPS IN A GROWING ECONOMIC CYCLE, BUT AT THE SAME TIME HAVE THE STABILITY TO PROTECT ON THE DOWNSIDE. THE WAY WE'VE REPOSITIONED MORGAN STANLEY IS AROUND OUR CLIENTS BUT PROVIDING TO -- TO PROVIDE THE BALANCE BETWEEN INSTITUTIONAL SECURITIES, WHICH IS OBVIOUSLY MORE VOLATILE, AND WEALTH MANAGEMENT, WHICH IS MUCH MORE PREDICTABLE. IT'S A CORE STRATEGY. IT'S NOT VERY DIFFERENT FROM FRANKLY WHERE SOME OF THE SWISS BANKING OPERATIONS HAVE MOVED OVER THE LAST SEVERAL DECADES AND IT'S SOMETHING WE FEEL VERY GOOD ABOUT.

FABER: YOU HAVE THE OPPORTUNITY BEGINNING NEXT YEAR TO BUY ADDITIONAL OWNERSHIP OF MORGAN STANLEY SMITH BARNEY, WHICH YOU ALREADY CONTROL. WILL THE FIRM TAKE ADVANTAGE OF THAT OPTION NEXT YEAR OR WAIT?

GORMAN: THE BEAUTY OF THE WAY THE DEAL WAS STRUCTURED WAS WE HAVE AN OPEN ENDED CALL OPTION TO BUY THE REMAINING 49% IN THREE TRENCHES. 14% BEGINNING NEXT MAY, 15% 12 MONTHS AFTER THAT AND 20% 12 MONTHS AFTER THAT. WHAT IS IMPORTANT IS THAT WE END UP OWNING THE BALANCE OF THAT INSTITUTION. THAT'S AN IMPORTANT STRATEGIC PREROGATIVE FOR MORGAN STANLEY. THE TIMING OF WHEN WE DO IT IS MUCH LESS IMPORTANT.

FABER: YOU ARE TRADING AT HALF OF BOOK VALUE, MAYBE A BIT ABOVE THAT --

GORMAN: I HADN'T NOTICED THAT.

FABER: HOW DO YOU ALLOCATE CAPITAL TOWARDS ANYTHING WHEN YOU'RE NOT BEING VALUED AT BOOK?

GORMAN: SURE. IT'S THE RIGHT QUESTION. AND OBVIOUSLY WE WILL SPEND A LOT OF TIME BETWEEN NOW AND NEXT MAY WHEN THE FIRST OPPORTUNITY TO BUY THE NEXT 14% IS AROUND. EVALUATING VARIOUS CAPITAL PLANS BETWEEN, FRANKLY, DIVIDENDS, BUYBACKS AND OBVIOUSLY ANY FURTHER INVESTMENT IN SMITH BARNEY AT THAT POINT. BUT AS I SAID DAVID, THERE'S A BIG DISTINCTION BETWEEN WHAT OUR STRATEGIC INTENT IS AND THE PHYSICAL TIMING OF IT. OUR STOCK IS UP I THINK 24% IN THE LAST TWO WEEKS.

FABER: AND DOWN 37% FROM THE YEAR STILL.

GORMAN: ABSOLUTELY. SO WHERE IT WILL BE FOUR WEEKS FROM NOW LET ALONE SIX MONTHS FROM NOW WILL HELP DICTATE OUR RESPONSE TO THAT QUESTION.

FABER: NOW THAT STOCK OF COURSE HAVING BEEN AT 12 AS YOU REFERENCED NOT LONG AGO, IN PART BECAUSE OF A SPATE OF RUMORS THAT CONTINUED FOCUSED ON YOUR EXPOSURE TO THE PERIPHERAL SOVEREIGNS IN EUROPE AS WELL AS THE FRENCH BANKS. WHEN I LOOK AT YOUR SUPPLEMENT TO YOUR EARNINGS TODAY, I SEE HARDLY ANY NET EXPOSURE. WAS THAT A FRUSTRATION TO YOU? DOES IT CONTINUE TO BE AND HOW DO YOU GO ABOUT COMBATTING THOSE KINDS OF RUMORS THAT HAVE AN ABSOLUTE IMPACT ON YOUR ABILITY TO DO BUSINESS?

GORMAN: IT WAS A FRUSTRATION, I'LL BE HONEST ABOUT IT. WE WERE IN A QUIET PERIOD. SO WE COULDN'T COME OUT AND ACTIVELY ADDRESS ALL OF THESE RUMORS WITHOUT PUTTING OUT VARIOUS DISCLOSURES. FRANKLY, I'M NOT SURE IT'S GOOD MANAGEMENT TO BE OUT THERE DEBATING WITH WHAT EVERY BLOGGER SAYS ABOUT YOU OR EVERY PUNDIT MIGHT OPINE. WHAT REALLY MATTERS ARE THE FACTS. WE HAD THE ADVANTAGE OF KNOWING WHAT THE FACTS ACTUALLY WERE. WE HAD THE KNOWLEDGE THAT WE COULD WITH CERTAINTY PUT THEM OUT -- IN FACT, THE SUPPLEMENT YOU REFERENCED WAS A NEW PAGE TO DO EXACTLY THAT. ADDRESS IN AS MUCH DETAIL AS WE POSSIBLY COULD OUR EXPOSURES, GROSS AND NET, TO THE PERIPHERALS AND TO FRANCE. AND THAT'S EXACTLY WHAT WE DID. WE LET THE FACTS SPEAK AND I THINK THE MARKETS RESPONDED.

FABER: YOU ALSO HAVE A LOT OF SHORT-TERM LIQUIDITY, YOU ARE NOT RELYING AS MUCH ON SHORT-TERM FUNDING AS YOU WERE SOME TIME AGO. WAS THERE EVER A POINT WHILE YOU WERE WATCHING YOUR CDS BLOW OUT AND YOUR STOCK DECLINE BY DOUBLE DIGIT PERCENTAGES THAT YOU WERE CONCERNED ABOUT THE VIABILITY OF THE FIRM?

GORMAN: NONE AT ALL. AND I LIVED THROUGH 2008. SO WE SPEAK WITH SOME EXPERIENCE OF WHAT REAL CONCERNS ARE. I HAD A FUNNY EXPERIENCE. THE THURSDAY WHEN OUR CDS WAS STARTING TO REALLY GAP OUT THERE, I SPENT MOST OF THE DAY TRYING TO FIGURE OUT HOW TO COMMUNICATE TO OUR EMPLOYEES, TO GIVE THEM A SENSE OF CALM AND CONFIDENCE BUT WITHOUT FURTHER IGNITING MORE RUMORS. THREE YEARS AGO, THE EQUIVALENT DAY WE SPENT MOST OF THE DAY IN CONVOYS OF CARS RACING DOWN TO OUR REGULATORS TALKING TO OTHER INSTITUTIONS ABOUT TRANSACTIONS, WATCHING CASH MOVING IN AND OUT OF THE BUILDING. IT WAS A COMPLETELY SURREAL EXPERIENCE THIS TIME AROUND. AND IT HAS TAUGHT US A LESSON. THE INFORMATION AGE MOVES INFORMATION WITHOUT FILTER VERY FAST. AND FORTUNATELY A NUMBER OF THE NEWS ORGANIZATIONS, INCLUDING YOUR OWN, AND A NUMBER OF THE ANALYSTS OUT THERE, GOT THE HARD FACTS AND STARTED TELLING THE STORY. BUT UNTIL THE FIRM COULD ACTUALLY COME OUT AND SAY WITH CERTAINTY AND PRESENT SUPPLEMENTS -- UNTIL WE COULD DO THAT, YOU DON'T TOTALLY PUT IT TO BED. WE PUT IT TO BED.

FABER: WE ARE MORE OR LESS OUT OF TIME, BUT I DID WANT TO ASK A FINAL QUESTION ABOUT A LOT OF PEOPLE DOWN IN ZUCCOTTI PARK TODAY WHO ARE PROBABLY GETTING VERY WET WHO REMEMBER THE '08 PERIOD AND BELIEVE ULTIMATELY THAT A FIRM LIKE MORGAN STANLEY WAS HELPED OUT A GREAT DEAL BY THE U.S. TAXPAYER TO A CERTAIN EXTENT TO STAY IN BUSINESS AND YET, OF COURSE, HELPED CAUSE A RECESSION THAT'S PUT A LOT OF PEOPLE OUT OF WORK. WHAT DO YOU SAY TO THOSE PEOPLE WHO ARE DOWN THERE OCCUPYING WALL STREET?

GORMAN: WELL YOU GOT TO LOOK AT THE FACTS. WE HAVE OVER 9% UNEMPLOYMENT. THAT'S A PEOPLE WHO ARE CURRENTLY REGISTERED AS UNEMPLOYED SO IT IS HIGHER. 14% OF HOMES ARE IN FORECLOSURE. THERE IS A LOT OF STUDENT DEBT AND A LOT OF COLLEGE KIDS COMING OUT OF SCHOOL WHO ARE FINDING IT TOUGH TO GET JOBS IN THIS MARKETPLACE. THAT THERE'S ANGER OUT THERE IS NOT SURPRISING. WHAT WE NEED TO FOCUS ON WITH THE ADMINISTRATION AND HOPEFULLY WITH THE WHOLE POLITICAL COMMUNITY ARE SOLUTIONS. WE NEED -- AS A BANKING INDUSTRY, WE NEED TO DO TWO THINGS. ONE, MAKE ABSOLUTELY SURE THAT WE'RE FORTRESSED STRONG AND WE CAN UNDERGO THIS KIND OF CRISIS AGAIN. AND NUMBER TWO, USE OUR BALANCE SHEET AND OUR CAPABILITIES AS INSTITUTIONS TO HELP PROVIDE STIMULUS TO THE ECONOMY THAT WILL CREATE THE JOBS, THAT WILL GIVE THE PROTESTERS A RESPONSE TO WHAT THE REAL PROBLEM IS.

FABER: DO YOU THINK YOU'RE DOING THAT NOW?

GORMAN: UNAMBIGUOUSLY, WE'RE IN A COMPLETELY DIFFERENT FINANCIAL STRENGTH AND RISK PROFILE FROM WHERE WE WERE THREE YEARS AGO. AND SECONDLY, YES WE ARE BOTH THROUGH OUR WEALTH MANAGEMENT BUSINESS WHERE WE PROVIDE LOANS NOW IN ADDITION TO OUR WEALTH MANAGEMENT ACTIVITIES AND OUR CORPORATE UNDERWRITING AND CORPORATE LENDING BUSINESSES THAT WE ARE DOING INSTITUTIONAL SECURITIES.

FABER: WE ARE OUT OF TIME. MR. GORMAN, THANK YOU.

GORMAN: THANKS. APPRECIATE IT VERY MUCH.

FABER: JAMES GORMAN, CEO OF MORGAN STANLEY REPORTING FROM, OF COURSE, THE HEADQUARTERS OF THE FIRM IN MIDTOWN MANHATTAN. BACK TO YOU, SCOTT.

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