Milken Transcript: JPM CFO Ruth Porat on High-Frequency Trading and Regulation
Ruth Porat, Chief Financial Officer at Morgan Stanley, spoke with Bloomberg Television's Stephanie Ruhle and Erik Schatzker today at the Milken Institute 2014 Global Conference. Porat discussed the company's first-quarter performance and outlook, high-frequency trading, and women in executive roles on Wall Street.
On whether Morgan Stanley is in the post-regulatory world, Porat said: "We think we are pretty close to it. We have meaningfully reduced risk related assets...we have also made investments in technology. So as the industry's moving more to central clearing, we feel we were early. And at the forefront of that and that sets us up well for the new regulatory environment, so we do think we are close. We still have more work to do -- you can see it in our ROE, but we are getting there."
On women in executive roles: "I think we are slowly moving forward and to continue to move forward, what's very important is to ensure that you have processes and systems that actually go deep into organizations, develop succession planning and actually make it part of the business case. It's got to be part of the business case, not just a nice path."
- Business Trends From 1q Are Continuing In 2q
- 'Pretty Close' To Done With Fixed-Income Reshaping
- Hft Isn't A Big Driver Of Firm's Business
- Stock Trading Could Benefit From More Transparency
- U.S. Equity Market Is Fundamentally Fair
- Private Bank Unit Is Biggest Driver Of Roe
- 'Very Much On Track' To Close Rosneft Deal
- Timing Of Rosneft Deal Dependent On Regulators
- Women On Wall Street Are `Slowly Moving Forward'
Morgan Stanley CFO: Low Trading Volumes to Persist
ERIK SCHATZKER: Indeed, it is Ruth Porat. She is the chief financial officer of Morgan Stanley, the Wall Street firm that had a great first quarter. You cannot say that about everybody, Ruth. It's so good to see you.
RUTH PORAT: Thank you. Great to be here.
SCHATZKER: Thank you for joining us. So let's talk about where things stand on Wall Street right now. Morgan Stanley did have relatively speaking a good first quarter, made everybody, including you, James Gorman obviously, feel good. We're a month into the second quarter. How does it feel?
PORAT: I think the trends we saw in the first quarter continue so M&A, you see it every day, there is another announcement --
SCHATZKER: Yes, today, it's AstraZeneca and Pfizer.
PORAT: -- and they're large, they're global. A lot of cross-border activity. So we're continuing to see that trend. And I've been talking about that for quite some time. But it's being driven by a number of things, cross-border one, but obviously activist activity and with M&A activity, you also see the follow-on financing activity. So that part of it feels good.
On the trading side, the volumes that we talked a lot about during the first quarter with lower activity we continue to see that really does persist into the second quarter at this point.
RUHLE: So why stay in the fixed income trading market? You think about high-yield mortgages, those are expensive businesses to be in and they take a ton of capital and the top talent in those seats want to get paid a ton of money. Why stay in those businesses at all?
PORAT: So what we've done over the last couple of years is really do a bottoms-up build. And our question to ourselves, is given the strength we have across our investment banking business, across our wealth management business, how should we size the business. It's very much to your question. It's expensive and there is a lot of capital but to have a vibrant institutional security system, in our view, to drive return on equity as high as we can, we need to be in fixed income.
And I talk about this every quarter. We have $500 million of fixed income underwriting activity in our investment banking business. And that supports what our clients want and it also drops to the bottom line. You need to have that distribution side of the business as well. So there are a lot of linkages like that.
SCHATZKER: Is that work mostly done rightsizing the business, bringing down the risk-weighted assets, dedicating more capital? Are you operating from a position now where Morgan Stanley is in the post-regulatory world?
PORAT: We think we are pretty close to it. We have meaningfully reduced risk related assets, to your question, from $390 billion (ph) to you know, third quarter of '11 to $199 billion this quarter. That's a big reduction.
We have also made investments in technology. So as the industry's moving more to central clearing, we feel we were early. And at the forefront of that and that sets us up well for the new regulatory environment, so we do think we are close. We still have more work to do -- you can see it in our ROE, but we are getting there.
RUHLE: When you say technology, it makes me think dark pools and high frequency trading. Michael Lewis obviously put it in front and center. What do you think? What is your response to all of this?
PORAT: We have been very early and vocal with regulators going back to 2009. There is a lot of a record about the importance of market structure and what can be done to improve markets with greater transparency and tighter governance around it.
So we do think there are some improvements that can be made. But it is just one form of execution clients choose and as markets evolve, we evolve. But it's not a big driver of our business.
RUHLE: Are you concerned we will get more regulation that could affect you? Michael Lewis coming out, calling the stock market rate, causing such a stir, what does that mean for your team?
PORAT: I think the main point is we are proud. If you go back again to '09, 2009, Channel 11 told (ph) we were vocal with regulators about the kind of changes that would enhance the markets.
We think, as I said, transparency, governance around certain elements of this is really important. And so in other words, look, we have evolved meaningfully over many years and a lot of change in particular in equity markets with a leading franchise. So we feel we're very well positioned --
SCHATZKER: Are the markets fair?
PORAT: We think they are. And I think if you look at the U.S. equity market, it is the largest market, the most liquid market and can there be some improvement? Yes, but fundamentally, yes, it's fair.
SCHATZKER: You mentioned a moment ago that there is still work to do to improve your profitability if you measure it by return on equity. And I'm sure your shareholders would agree.
But Harvey Schwartz, your counterpart at Goldman Sachs, said just the other day it would be a herculean task -- I believe that's the choice of words -- to raise ROE levels broadly speaking from where they are now. I take it you disagree?
PORAT: Oh, we very much disagree and one of the things we often talk about is Morgan Stanley-specific tailwinds. But the biggest numerical driver of ROE at Morgan Stanley is our bank. So with the wealth management acquisition, we picked up a lot of deposits. We have $140 billion of deposits at Morgan Stanley, 10th largest bank in the U.S., once all those deposits come in in the next year.
And that tailwind alone, just as we continue to deploy those deposits into lending products to our wealth management clients and our institutional clients is a big tailwind for us. What we're doing within fixed income is a tailwind. What we're doing within wealth management is a tailwind. So we -- our view is we have some very specific Morgan Stanley tailwinds.
SCHATZKER: One of the -- go ahead.
RUHLE: I want to talk other tailwinds, your commodities business. The game plan is to be selling that commodities business to Rosneft (ph). We hear --
SCHATZKER: Part of it.
RUHLE: -- this morning -- part of it -- we heard this morning there's going to be U.S. sanctions against the CEO. Will that affect your plans to sell this business?
PORAT: No. Our view is that we are very much on track for closing in the second half of this year. That's what we're focused on doing. It is obviously subject to regulatory approval. But as I was saying, it's just the physical oil component within our overall commodity system.
SCHATZKER: So I think we need to just make sure that we understandably exactly how -- obviously it is subject to regulatory approval but from where you sit right now, with sanctions announced against Igor Sechin, the CEO of Rosneft (ph), does that pose -- do you believe that that poses any risk to the completion in the second half?
PORAT: Look, I cannot comment on the regulatory environment. But -- and it is subject to regulatory approval. Our view is we're continuing to focus on closing the second half of this year.
SCHATZKER: Steve Schwarzman was just here a moment ago. Stephanie asked him whether he feels like we are living in a second tech bubble and Steve pointed to the acquisition of WhatsApp for $19 billion by Facebook, saying anytime somebody's prepared to pay that much money for a business that has no profits, it should at the very least be a wake-up call. David Einhorn says that we are living in a second tech bubble.
Clearly, Ruth, if we were living in a second tech bubble, and that bubble were to burst, it would pose -- it would be a terrible thing for your business, particularly from the wealth management side.
So you look at valuations. You need to do this as your job, as part of your job as the CFO. And how do you feel about them?
PORAT: I think the difference if you go back to the late 90's is that we are seeing a more substantial change in businesses and business models.
And for the most part, what you really see is a scale to those businesses. And anytime you have the opportunity to pick up that kind of a customer base, it's transformative. And so again, does one always need to be concerned about valuations, anytime, anywhere?
Absolutely, that's our job and our role. But I think what we also see within technology is the power of the global reach, the impact and more solid earning stream underneath. So --
SCHATZKER: Is it easier to justify those valuations today than it was back in '98 and '99?
PORAT: I think in retrospect, yes, relative to '98-'99.
SCHATZKER: You mentioned -- we have to run in one second, but I want to ask you a question about activism. You mentioned earlier that activism is a good thing or at least is helping to propel the M&A market. Clearly it is. Just look at what's happening with Valeant.
RUHLE: But remember, Valeant happened without a bank being involved. So that's not a good thing for bankers.
SCHATZKER: Ruth Porat, what do you say about that?
PORAT: Well, I think overall when you're seeing more activity in M&A, it is a pick-up in our activity, particularly on the advisory side and there's a pick-up on the financing side. And very much to your -- I think where you're heading with it, activism has been motivating more activity.
And one of the other very important elements that we see when you look at overall M&A activity is acquired stock is going up. So acquirers are actually being motivated and rewarded by their shareholders for making smart, strategic deals that, again, are underscoring more smart strategic deals.
RUHLE: I've got to ask before we go, less than a month ago, you said it is an embarrassment how few women are running companies today. How did we get to this place? Why is that the case?
PORAT: Well, I put it in context; 50 years ago with the Civil Rights Act in '64 and here we are 50 years later, only 4 percent of CEOs in Fortune 500 companies are women. I think that --
SCHATZKER: It is an embarrassment.
PORAT: And I think we can call it an embarrassment or an opportunity to improve. I think one of the most interesting pieces of analysis that's coming out from many different places is one that shows the correlation between greater diversity at a senior level or at a board and innovation and performance. And so, again, if we can tie it to the business case, hopefully that's more of a catalyst.
RUHLE: Why hasn't it happened? Sallie Krawcheck just said to us on Wall Street, she thinks we have moved backwards.
PORAT: Well, I think we are slowly moving forward and to continue to move forward, what's very important is to ensure that you have processes and systems that actually go deep into organizations, develop succession planning and actually make it part of the business case. It's got to be part of the business case, not just a nice path (ph).