Transcript of Charlie Rose's Interview With John J. Mack

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The Charlie Rose Show Session OneGuest:John Mack Charlie Rose:John Mack is here. He is the Chairman and CEO of the legendary Wall Street firm,Morgan Stanley. Over the past two years, he has fought to keep the financial crisis fromoverwhelming his bank. After last year's collapse of Bear Stearns and Lehman Brothers,Morgan Stanley's stock fell over 80 percent in a year. The bank eventually stabilized lastfall when Mitsubishi bought a 21 percent stake in the bank. The bank has also received billions [spelled phonetically] from the government's Troubled Asset Relief Program.Earlier this month John Mack was one of several top Wall Street executives summoned by Congress to testify about the program.[clip playing]The government's effort to rescue the nation's ailing banks continues. The Obamaadministration today announced that it may sharply increase its stake in major banks if the government determines they're too weak to survive. Public reports indicate that thegovernment could take common shares of Citigroup, the embattled banking giant, themarkets remain shaky today on the news with the Dow Jones industrial average droppingto 7,115 points, its lowest level since May, 1997. I am pleased to have John Mack back on this program, and in a full disclosure, I note that he has been a friend for some 40years. We went to the same school. Our fathers at different ends of the state were in thesame business. I occasionally do things with Morgan Stanley, and we were married tosisters. All of that in a long term relationship with a man I admire and consider a friend, but we want to have an interesting conversation here this evening because he is at thecenter of one of the most dramatic economic developments I have certain ever seen.Welcome. Having said that.John Mack:Thank you, Charlie.Charlie Rose:You and I growing up in North Carolina never imagined that we'd sit at a table like thisand talk about the most extraordinary financial crisis, economic crisis the world has seensince the great depression.John Mack:You're exactly right. I don't think anyone had any idea that this could happen. And Ithink that's part of the problem. I think as we got into the crisis, it was very difficult tolook out and see how bad it was going to be, how severe it was going to be. Some of thesolutions and some of the things that were put into effect at the time we thought wereenough and clearly, either the fed or the treasury thought they were enough. But the factis, it was a lot worse. And it's not enough, and it's not just the United States. It's global.I was just in China, I was in the Middle East, I was over in France, in the Netherlands, inthe U.K., in Spain. All these countries are going through a radical change. Some a lot

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worse than others. Clearly the China and Middle East are faring better. But you go toeastern Europe, you go to Spain, Italy, they're all having a tough time.Charlie Rose:And what does a tough time mean?John Mack:Tough time means that there has been either a boom in real estate, there has beenoverleveraging, there has been huge growth, there have been a lot of loans extended, andnow those loans are coming due. They can't be paid. Projects that were being built arestopped. If you look at China, which is a huge export nation, exports are downdramatically. Even though they have very big reserves and will be able to put money intoinfrastructure and keep people employed, they're suffering from this. The Middle Eastclearly has had a boom with the energy prices and what's gone on. Just in Dubai, thingshave slowed down. I don't know if you saw in the paper today that $20 billion is comingfrom Abu Dahbi to help buy the debt of Dubai and keep them on target to pay their debtservice. You go to Italy, you go to Germany, it doesn't make any difference. The banksare leveraged. Just like here in the United States. Just like in the U.K. But I think in theUnited States, we are ahead as far as deleveraging. If you look at Morgan Stanley --Charlie Rose:Explain to the audience what deleveraging means.John Mack:Well, basically you take one dollar and borrow 10 times or 30 times against that onedollar. And at the peak, as I said, when I was Washington, Morgan Stanley hadleveraged 31 times, so we took one dollar and turned it into $31. We had a balance sheetof over a trillion dollars. And we have taken that down dramatically, as the other banks--Charlie Rose:To what? Something like 16 or 17?John Mack:We're below that. We're probably at 12 times leverage. We've taken our balance sheetfrom 1.1 trillion to about 600 billion. So it's come down dramatically.Charlie Rose:When you -- take China, for one example. Secretary of State, who you supported as a political candidate and I assume is a friend of yours is over there, and clearly, she'stalking about, that they can do together, the Chinese government and the Americangovernment, about climate control and things like that. How she's not talking abouthuman rights, gotten some criticism for that. But what she's also taking to them about iswhether they're going to continue to want to lend money to the United States.John Mack:

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Right.Charlie Rose:What's your impression of their attitude about that?John Mack:Well, my impression is that they will continue. I mean I think I read today either in the journal, the Financial Times, either Yan Sheshaun [spelled phonetically] or one of thesenior members, I think Wan Sheshaun, is one of the vice premieres.Charlie Rose:Yeah, go ahead.John Mack:And someone I've known for 15 years. It's very clear that the U.S. and China in manyways are tied together. We are a huge buyer of the products that they produce. Theyunderstand that. When you think about -- if you're going the invest, where would youinvest, I think the Chinese understand there is stability in this country. This is a benefitfor the two countries working together. And clearly, they own a lot of our debt, and, youknow --Charlie Rose:More than any other nation in the world?John Mack:Well, without question, Charlie. But if you think about it, that's probably been one of the best investments anyone has made over the last two years, when you see how rates havecome down, which is increased on a principle amount. Their principle activity with these bonds. So I think the two countries will work together. I also think that SecretaryClinton, on her first meeting there, approached it the right way. I'm glad she didn't bringup some of the issues that have been so --Charlie Rose:Divide.John Mack:And I'm sure she will at some point, but not on your first meeting. You're trying to build bridges. I think she went about it exactly the right way.Charlie Rose:While we're in Asia, Japan. Japan went through a terrible experience in the '90s, andeverybody talks about the lessons of Japan. What are the lessons of Japan?John Mack:Well, the lessons of Japan would be that once they went through that severe restructuring,they had a lot of bad real estate on their books. If you remember, the banks, all merged