Feb. 23 (Bloomberg) -- Morgan Stanley Chief Executive Officer John Mack said some of the areas in which the firm has done business will face new restrictions from regulators, although he didn’t specify which ones.

“Some of the businesses that we’ve been in in the past are going to be curtailed, I’m not sure if it’s private equity, the real estate business,” he said today in an interview with Charlie Rose scheduled to air tonight on PBS. Regulators “need to see what we’re doing before we do it, and that’s a huge change.”

Morgan Stanley, like larger rival Goldman Sachs Group Inc., converted to a bank holding company in September and is now supervised by the Federal Reserve instead of the Securities and Exchange Commission. The Fed granted both New York-based firms temporary reprieves from rules barring banks from participating in certain businesses, such as owning non-financial assets.

Mack, 64, also said hedge funds should have “some type of regulatory oversight” and be required to report positions to regulators. Hedge-fund industry assets worldwide shrank to $1.5 trillion at the end of 2008 from a peak of $1.9 trillion as the credit crisis sapped returns and led investors to withdraw money, according to Singapore-based data provider Eurekahedge PTE.

‘A Lot Worse’

The credit crisis is affecting countries around the world to an unprecedented degree and became “a lot worse” than most market participants expected, Mack said in the interview. He said the U.S. under President Barack Obama is ahead of other countries in its efforts to reduce debt carried by investors and the financial system.

“I give high marks to the president in a very short period of time,” he said. “This is an economic war, and in a war you never know what the next battle is going to be.”

Mack said he’s “optimistic” the economy will recover, “but between now and then it’s going to be a rocky road.” He noted that the financial markets today, with U.S. stock indexes dropping to a 12-year low, was “pretty dismal.”

Nationalization of struggling U.S. banks “is not the long- term answer to this,” Mack said. Instead he said the banks should get support and direction from the government and manage themselves out of the crisis.

‘Pay for Performance’

On compensation, Mack said Morgan Stanley believes in “pay for performance,” noting that he didn’t receive any bonuses for 2007 and 2008 even though the firm was profitable in both years.

“If you look at our stock price, I don’t think anybody can say that John Mack performed well,” he said. “Executive compensation is something that without question has gotten out of hand, and we need to fix it.”

Letting firms “claw back” bonuses in the years after they’re allocated and paying a greater share of compensation in stock is the best way to address the problem, Mack said.

Imposing too many pay limits on Morgan Stanley and other firms that got money from the government’s Troubled Asset Relief Program will allow competitors and non-U.S. banks to lure away many of the most talented bankers and traders, he said.

“There’s no question that talented people will be able to go to other firms, either national firms that are not controlled by TARP or international firms,” Mack said.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: February 23, 2009 20:16 EST